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42–460 CC 1997

OVERSIGHT OF THE BUREAU OF LABOR

STATISTICS: FIXING THE CONSUMER PRICE INDEX

HEARING

BEFORE THE

SUBCOMMITTEE ON HUMAN RESOURCES

OF THE

COMMITTEE ON GOVERNMENT 

REFORM AND OVERSIGHT 

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

FIRST SESSION

APRIL 30, 1997

Serial No. 105–28

Printed for the use of the Committee on Government Reform and Oversight

(

(II)

COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT 

DAN BURTON, Indiana, Chairman 

BENJAMIN A. GILMAN, New York 

J. DENNIS HASTERT, Illinois 

CONSTANCE A. MORELLA, Maryland 

CHRISTOPHER SHAYS, Connecticut 

STEVEN SCHIFF, New Mexico 

CHRISTOPHER COX, California 

ILEANA ROS-LEHTINEN, Florida 

JOHN M. MCHUGH, New York 

STEPHEN HORN, California 

JOHN L. MICA, Florida 

THOMAS M. DAVIS, Virginia 

DAVID M. MCINTOSH, Indiana 

MARK E. SOUDER, Indiana 

JOE SCARBOROUGH, Florida 

JOHN B. SHADEGG, Arizona 

STEVEN C. LATOURETTE, Ohio 

MARSHALL ‘‘MARK’’ SANFORD, South 

Carolina 

JOHN E. SUNUNU, New Hampshire 

PETE SESSIONS, Texas 

MICHAEL PAPPAS, New Jersey 

VINCE SNOWBARGER, Kansas 

BOB BARR, Georgia 

ROB PORTMAN, Ohio 

HENRY A. WAXMAN, California 

TOM LANTOS, California 

ROBERT E. WISE, JR., West Virginia 

MAJOR R. OWENS, New York 

EDOLPHUS TOWNS, New York 

PAUL E. KANJORSKI, Pennsylvania 

GARY A. CONDIT, California 

CAROLYN B. MALONEY, New York 

THOMAS M. BARRETT, Wisconsin 

ELEANOR HOLMES NORTON, Washington, 

DC 

CHAKA FATTAH, Pennsylvania 

ELIJAH E. CUMMINGS, Maryland 

DENNIS J. KUCINICH, Ohio 

ROD R. BLAGOJEVICH, Illinois 

DANNY K. DAVIS, Illinois 

JOHN F. TIERNEY, Massachusetts 

JIM TURNER, Texas 

THOMAS H. ALLEN, Maine 

HAROLD E. FORD, JR., Tennessee 

———

BERNARD SANDERS, Vermont 

(Independent) 

KEVIN BINGER, Staff Director 

DANIEL R. MOLL, Deputy Staff Director 

JUDITH MCCOY, Chief Clerk 

PHIL SCHILIRO, Minority Staff Director 

SUBCOMMITTEE ON HUMAN RESOURCES

CHRISTOPHER SHAYS, Connecticut, Chairman 

VINCE SNOWBARGER, Kansas 

BENJAMIN A. GILMAN, New York 

DAVID M. MCINTOSH, Indiana 

MARK E. SOUDER, Indiana 

MICHAEL PAPPAS, New Jersey 

STEVEN SCHIFF, New Mexico 

EDOLPHUS TOWNS, New York 

DENNIS J. KUCINICH, Ohio 

THOMAS H. ALLEN, Maine 

TOM LANTOS, California 

BERNARD SANDERS, Vermont (Ind.) 

THOMAS M. BARRETT, Wisconsin 

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California 

LAWRENCE J. HALLORAN, Staff Director and Counsel 

CHRISTOPHER ALLRED, Professional Staff Member 

ROBERT NEWMAN, Professional Staff Member 

R. JARED CARPENTER, Clerk 

RON STROMAN, Minority Professional Staff Member 

KAREN LIGHTFOOT, Minority Professional Staff Member 

(III)

C O N T E N T S 

Page 

Hearing held on April 30, 1997 .............................................................................. 1

Statement of: 

Abraham, Katharine G., Commissioner of Labor Statistics, Department 

of Labor, accompanied by William Barron, Deputy Commissioner of 

Labor Statistics ............................................................................................. 9

Hulten, Charles R., professor of economics, University of Maryland; Kurt 

E. Karl, executive vice president, U.S. Macroeconomic Services, WEFA; 

Dean Baker, economist, Economic Policy Institute; and Matthew D. 

Shapiro, professor of economics, University of Michigan .......................... 91

Letters, statements, etc., submitted for the record by: 

Abraham, Katharine G., Commissioner of Labor Statistics, Department 

of Labor: 

Information concerning expenditure weights .......................................... 55

Information concerning trends in earnings ............................................. 36

Prepared statement of ............................................................................... 11

Baker, Dean, economist, Economic Policy Institute, prepared statement 

of ..................................................................................................................... 124

Hulten, Charles R., professor of economics, University of Maryland, prepared statement of ........................................................................................ 94

Karl, Kurt E., executive vice president, U.S. Macroeconomic Services, 

WEFA, prepared statement of ..................................................................... 109

Kucinich, Hon. Dennis J., a Representative in Congress from the State 

of Ohio, prepared statement of .................................................................... 8

Shapiro, Matthew D., professor of economics, University of Michigan, 

prepared statement of ................................................................................... 135

Shays, Hon. Christopher, a Representative in Congress from the State 

of Connecticut, prepared statement of ........................................................ 3

(1)

OVERSIGHT OF THE BUREAU OF LABOR 

STATISTICS: FIXING THE CONSUMER PRICE 

INDEX 

WEDNESDAY, APRIL 30, 1997 

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON HUMAN RESOURCES, 

COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT, 

Washington, DC. 

The subcommittee met, pursuant to notice, at 10:10 a.m., in room 

2203, Rayburn House Office Building, Hon. Vincent Snowbarger 

(vice chairman of the subcommittee) presiding. 

Present: Representatives Shays, Snowbarger, Towns, Barrett, 

and Sanders. 

Ex officio present: Representative Waxman. 

Staff present: Lawrence J. Halloran, staff director and counsel; 

Christopher Allred, and Robert Newman, professional staff members; R. Jared Carpenter, clerk; and Ronald Stroman and Karen 

Lightfoot, minority professional staff members. 

Mr. SNOWBARGER. We are going to call the committee to order. 

Chairman Shays is not able to be with us, at least for the first part 

of the hearing, so I will be chairing until his arrival. 

The purpose of this hearing is to examine how the Bureau of 

Labor Statistics maintains the accuracy of the Consumer Price 

Index. The subcommittee will consider how the CPI should be 

made more accurate. The hearing will also discuss the avoidable 

and unavoidable biases in the CPI. 

I am a strong supporter of indexing benefits, and especially 

taxes, for inflation. Ordinary Americans should be guaranteed that 

the taxes they are required to pay are based upon fair and accurate 

statistics, and that the benefits that they receive are accurately calculated to address their needs. I look forward to hearing from the 

panelists today as they discuss these important issues. 

Let me be clear, I understand and believe that the calculation of 

the CPI is the responsibility of the Bureau of Labor Statistics. It 

is not the job of Congress to be involved in the calculation of the 

CPI, nor should it be. This would raise the danger of politicizing 

economic statistics, such as what happened in the Soviet Union. 

Also, if changes had to be made legislatively, the opposition party 

would demagog the issue, as some White House officials were prepared to do in the past election. 

Congress does have the oversight responsibility to ensure that 

BLS is calculating the CPI accurately, as current economic methodology and technology allow. The CPI is one of the most important 

2

economic statistics calculated by the Federal Government. Its calculation is critical in determining how the Government will make 

benefit adjustments to offset the effects of inflation. Cost of living 

adjustments to Social Security, SSI, the Civil Service Retirement 

System, the Federal Employees Retirement System, veteran’s pensions, child nutrition, and food stamps are directly affected by the 

CPI. In addition to benefit adjustments, income tax rates are also 

indexed based on the CPI, so as to lessen bracket creep. 

In 1961, the Stigler Committee identified several problems associated with the calculation of the CPI. In fact, some of the concerns 

raised in today’s Boskin report were recognized by the Stigler Committee 35 years ago. I am troubled to see that these problems persist, and I am eager to hear what the BLS is doing to address these 

concerns. 

According to CBO estimates, starting in 1996, a 0.5 percent annual reduction in the CPI growth would have reduced the Federal 

budget deficit by $209 billion between fiscal year 1996 and fiscal 

year 2000. These numbers stress the need for this committee to address the questions raised by the Boskin Commission, and the 

Boskin Commission’s assertion that the CPI is overestimated by 

1.1 percent annually. If the Boskin report is accurate in its assessment that the CPI is overstated by 1.1 percent annually, then Government would overcompensate for inflation in the years fiscal year 

1996 to fiscal year 2000 about $400 billion more than the actual 

increase in the cost of living. 

The loss here is not to the Federal Government; the loss is to the 

American taxpayer, who is required to pay more to perpetuate this 

inefficiency. If taxpayers are to be spared this undue burden, then 

BLS must eliminate the bias in the CPI. Since so many decisions, 

both in the Government and the private sector, are based on the 

CPI, any inaccuracies in the CPI have a ripple effect that causes 

even greater distortions in our economy. The question of CPI accuracy is a multibillion-dollar question, and finding the answer is 

critical to the work we are undertaking to make Government more 

efficient and less burdensome. I do not necessarily want the CPI 

lowered or raised; I just want it to be an accurate reflection of the 

true economic conditions and as accurate as possible. 

Again, I would like to thank the chairman for holding this hearing. I look forward to the witnesses’ testimony and questions. 

I want to indicate one of the statements in the chairman’s statement that I want to make sure everyone understands, in terms of 

the presumptions that we have going into this hearing. ‘‘It now appears that there is not going to be any externally imposed CPI fix 

as a part of the 1998 Federal budget.’’ That’s as it should be. ‘‘The 

rendering of national economic statistics should be based on sound 

principles and valid data. The CPI should be immune to political 

manipulation, both external and internal.’’

So, because of those presumptions, we’re very interested in finding out how we can get to as accurate a CPI as possible. 

With that, Mr. Waxman. 

[The prepared statement of Hon. Christopher Shays follows:]

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Mr. WAXMAN. Thank you very much, Mr. Chairman. I want to 

thank you for holding this hearing, and I want to express my concurrence with your statement. 

The CPI involves many complex issues, and any change in that 

index is going to affect millions of people. I believe that any revision to the CPI should be made by the expert statisticians and 

economists at the Bureau of Labor Statistics. 

Revising the CPI should not and must not be a political decision. 

During the last several weeks of budget negotiations there has 

been much speculation over whether an adjustment to the CPI 

should be part of the budget package. In fact, today’s newspapers 

report that, in behind-the-scenes talks, negotiators are discussing 

adopting ‘‘experimental inflation indexes.’’ According to the reports, the cost of living measure would not be 

expressly changed, but an assumption to make those changes 

would be built into the budget deal. The formula mentioned could 

cut the CPI by as much as one-half of a percentage point. 

I strongly oppose any change in the CPI that is motivated solely 

by budget-balancing expediencies. CPI savings should not be used 

as some last-minute filler for a hole in the budget, particularly for 

a budget that contains deep cuts in Medicaid, the health care program for the very poor, and, in my view, unjustifiable tax cuts for 

the wealthy. 

It is essential that a CPI fix not result in a budget that achieves 

balance by irresponsibly sacrificing the interests of Social Security 

recipients, veterans, and other hard-working Americans, so that 

the money they have earned is redistributed to the wealthiest in 

our country. 

Let’s keep politics out of the CPI. We should all support additional funds to continue the work of BLS as a first-rate agency and 

fully support the professional decisions that its experts make based 

on the facts. I don’t want to see this budget build in some assumption that will exert pressure on the Bureau to live up to that expectation. I think it is completely inappropriate to do that. 

When the President presented his budget, he made certain assumptions based on the BLS expectations of what the CPI would 

be. We ought to stand with that and not change it for any political 

reasons, in order to deal with lack of sufficient revenues or cuts to 

bring the budget in any kind of balance. 

I think this is a hearing well worth having. It is important for 

us to look at these questions, and I thank you very much, Mr. 

Chairman, for holding it. 

Mr. SNOWBARGER. Mr. Sanders. 

Mr. SANDERS. Thank you very much, Mr. Chairman. 

I concur with Mr. Waxman. These are important hearings, and 

I’m glad that we are holding them. 

I find it curious that there is so much attention being paid, in 

the last year, to the CPI. Having been involved in politics for a little while, I have the feeling that that interest is not just because 

of intellectual curiosity on the part of Members of Congress but, as 

Mr. Waxman indicated, has something to do, perhaps, with the 

budget process. 

What I fear very much is that there are some people in Congress, 

or maybe in the White House, who would like to use a change in 

6

the CPI to balance the budget in a way that I consider to be very, 

very unfair. 

Mr. Snowbarger, you mentioned earlier about the Soviet Union. 

Remember, in the days of the Soviet Union, when they didn’t reach 

their quotas, all they would do is change the quota. So I fear very 

much now, instead of changing the economy to protect our elderly 

or our working people, what we are going to do is change the statistics and tell them, ‘‘Hey, you didn’t know it, but things are really 

much better than you thought. You thought you were working 

longer hours for low wages, but we have new statistics to tell you 

you’ve never had it so good.’’

Elderly people in my State can’t afford their prescription drugs. 

They can’t afford to heat their homes. And I think, I fear very 

much that there are some people who would like to tell those folks, 

‘‘You’re wrong. Things are really good. Look at the statistics.’’

I would say, Mr. Chairman, not having done an exhaustive study 

on the issue, but based on my own personal observations and reading a little bit about it, that for senior citizens, at least in some 

parts of this country, not only is the CPI not too high, it probably 

underestimates the increased costs that they incur in a given year. 

Perhaps Ms. Abraham will discuss that later, but I can tell you 

that, in my State, a lot of our senior citizens spend a lot of their 

money on health care, health care needs, prescription drugs. My 

understanding is that the cost of health care is going up considerably higher than the cost of inflation, in general. 

In my State, where the weather gets 20 below zero, people spend 

a lot of money on home heating fuel. The cost of home heating fuel 

is going way up. Now, I understand that computers are going 

down, but most of the senior citizens in my State, who are trying 

to get by on $7,000 or $8,000 a year, are not investing many thousands of dollars in computers. 

So I would argue that, based at least on what I see, for security 

who are on Social Security, probably the CPI underestimates the 

increased costs that they deal with every year. I would very strongly oppose any effort to cut the CPI as a back-door way of balancing 

the budget. 

What I fear very much is the politics of this whole issue, because 

I can see that it would be very easy for politicians to get up there 

and say, ‘‘We’re not cutting Social Security; we’re just readjusting 

the CPI. And we’re sorry, the senior citizen who is trying to get by 

on $7,000 a year, you’re going to get $100 less. But that’s not a cut; 

that’s just a readjustment.’’ I hope that this Government does not 

stoop to that level. 

Thank you very much, Mr. Chairman. 

Mr. SNOWBARGER. Mr. Towns. 

Mr. TOWNS. Thank you very much, Mr. Chairman. 

Thank you for holding this important and timely hearing. While 

most Americans have no idea how the Bureau of Labor Statistics 

calculates the Consumer Price Index, all of us are greatly affected 

by the calculations. The CPI affects everything from interest rates 

to taxes, to Social Security payments. In a very fundamental way, 

the CPI plays an important role in the quality of life for the citizens of our country, especially our senior citizens. 

7

For years, some economists have argued that the Consumer Price 

Index significantly overstates inflation. Other economists have argued that the CPI is a reasonably good measure of inflation, needing only modest adjustments. 

Reaching a consensus between these divergent points of view will 

be difficult and extremely complex. However, with Congress and 

the administration seeking the least painful way to balance the 

Federal budget, the CPI debate has suddenly become a significant 

factor in the budget negotiations. That is wrong. 

Our need to balance the budget should not drive a decision about 

whether to change the Consumer Price Index. Economists at the 

Bureau of Labor Statistics should make these decisions, not the 

Congress. These decisions should be made by the experts. 

We need to examine how any recommended changes will affect 

the working men and women of our country, our senior citizens, 

and our Nation’s poor. We must be careful not to balance the budget on the backs of those who can least afford it. 

I would like to join my colleague, Congressman Bernard Sanders, 

in saying that we need to be very sensitive to the needs of our senior citizens and people that have to pay a tremendous amount of 

their money, in terms of health care, and providing services for the 

poor. We need to be very sensitive to those kinds of issues. 

Mr. Chairman, I would like to welcome all of our witnesses 

today, and I look forward to working with you on this issue. But 

I want to say right up front, I have some deep concerns when I 

think about Members of Congress getting involved in this process, 

when I think it should be left totally up to the experts. 

Thank you. 

Mr. SNOWBARGER. Mr. Barrett, do you have an opening statement? 

Mr. BARRETT. No. 

Mr. SNOWBARGER. All right. 

I think, with that, we are ready for our first panel today, and 

that is Ms. Katharine Abraham, who is the Commissioner of Labor 

Statistics at the Department of Labor. 

Ms. Abraham, I would ask if you would stand, please. This is 

something we put everyone through that comes before the committee. 

[Witness sworn.] 

Mr. SNOWBARGER. With that, welcome to the committee, and we 

look forward to your testimony. 

Before you go on, let me get a few housekeeping things out of the 

way. First of all, I would ask unanimous consent that all members 

of the subcommittee be permitted to submit an opening statement 

for the record, and that the record remain open for 3 days for that 

purpose. Without objection, so ordered. 

I ask, further, unanimous consent that all witnesses be permitted to include their written statements in the record, and that 

the record remain open for 3 days for that purpose. And without 

objection, so ordered. 

[The prepared statement of Hon. Dennis J. Kucinich follows:]

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Mr. SNOWBARGER. Ms. Abraham. 

STATEMENT OF KATHARINE G. ABRAHAM, COMMISSIONER OF 

LABOR STATISTICS, DEPARTMENT OF LABOR, ACCOMPANIED BY WILLIAM BARRON, DEPUTY COMMISSIONER OF 

LABOR STATISTICS 

Ms. ABRAHAM. Thank you very much, Mr. Chairman. 

I do have a written statement that I would like to submit for the 

record. In light of the specific questions that I understood the subcommittee was to focus on, however, my remarks this morning are 

oriented toward talking about the actions that the Bureau of Labor 

Statistics has taken and is considering taking to make the CPI the 

best possible measure it can be. 

I would be happy, of course, to answer any questions that you 

or other Members might have about my submitted testimony, 

which examines some of the difficult conceptual and operational 

issues that have been raised about the use of the CPI as a proxy 

for change in the cost of living, including such things as the appropriate treatment of substitutions made by consumers in their purchasing decisions in response to changes in relative prices, changes 

in the quality of goods and services, and the increased availability 

of new goods and services in the marketplace. 

As you well know, interest in CPI measurement issues has 

heightened dramatically in the last few years, particularly in light 

of the impact of the index on Federal expenditures and receipts. 

Many, if not most, of the issues under discussion originated with 

research produced by the Bureau of Labor Statistics staff. 

I am proud to be able to say that the BLS has a long tradition 

of being in the forefront of price measurement research and operational innovation. A list of the many improvements the BLS has 

made to the CPI over the years is attached to my formal statement. 

I would like, if I could, to draw the subcommittee’s attention, in 

particular, to the series of improvements in the index the BLS has 

made in the last 2 years alone. These improvements include the 

identification and solution of the so-called ‘‘formula bias’’ problem, 

and the introduction earlier this year of a new approach to the 

measurement of prices for hospital services. We previously have estimated that the various improvements made during 1995 and 

1996 have probably had the net effect of reducing the rate of 

growth of the CPI by about 0.2 percentage point per year. Some of 

the changes made it grow slower. There was one change, in particular, that probably led to an index that grew slightly faster. 

In addition, earlier this month we commenced publication of a 

new experimental measure that, under certain conditions and assumptions, may better reflect consumer substitution within CPI 

item categories than the existing measures. Evaluation of the geometric mean formula underlying the new measure likely will lead 

to its partial adoption in the official CPI, which would address, in 

the terms of the Boskin Commission’s report, the lower level substitution bias. 

We will make a decision by the end of this year as to which CPI 

categories should employ this geometric mean formula, and we will 

introduce these modifications into the official index, most likely 

with the release of data for January 1999. Our estimate is that this 

10

will reduce the rate of CPI growth by somewhere between zero and 

a quarter of 1 percent per year, depending on how many and which 

CPI categories are modified to use the geometric mean approach. 

I also would like to report that the critical activities associated 

with the periodic CPI revision, for which we first requested and received funding from the Congress in 1995, remain on course. The 

CPI for the month of January 1998 will include new expenditure 

weights, updated from the 1982 to 1984 weights currently in use 

to weight based on data for the 1993 to 1995 period. The Congressional Budget Office has estimated that this change will reduce the 

annual rate of increase in the CPI by 0.2 percentage point per year. 

Further, I am pleased that the BLS has been able to propose a 

series of steps to strengthen the statistical and methodological infrastructure of the current CPI program. In addition to the funds 

to continue the CPI revision, as previously described, our 1998 

budget seeks about $2 million in new funding that will make it 

possible for us to begin the work needed to ensure that future CPI 

revisions can be conducted more rapidly. 

The same proposal includes funding to support enhancements to 

our methods for dealing with the changes in the quality of items 

consumers purchase, which, again, referring to the Boskin Commission report, was one of the big issues that they focused on, and also 

the emergence of new goods in the marketplace, another important 

issue. 

Finally, the funds we have requested also would allow us to 

produce supplemental measures that account for substitution 

across item categories, the so-called ‘‘upper-level substitution bias,’’ in a way that is not possible in the official CPI. 

I have tried to be brief in identifying the actions that we have 

underway to improve the CPI. I would, of course, be happy to describe any of these in greater detail or, indeed, to respond to any 

questions you might wish to ask. 

Thank you. 

[The prepared statement of Ms. Abraham follows:]

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Mr. SNOWBARGER. We don’t want you to be spooked by the light. 

If you have more to offer, we would be happy to give you the time. 

Ms. ABRAHAM. No, that was perfect timing. 

Mr. SNOWBARGER. All right. 

I would like to start off with a question that really kind of goes 

to the heart of, I guess, why this seems to be in controversy, and 

that is that we, as a Congress, have determined that whether it’s 

tax brackets, or whether it’s benefits of all kinds, these should 

somehow be adjusted for cost of living. Could you explain for the 

committee the difference between a Consumer Price Index and a 

cost of living index? 

Ms. ABRAHAM. The main conceptual difference between a cost of 

living index and a Consumer Price Index is that, ideally, a cost of 

living index would take into account the fact that, when prices of 

some things go up, prices of other things go up, at least in relative 

terms; that consumers can change their buying patterns in such a 

way that they don’t need as much more money to achieve the same 

level of well-being as they would if they just kept buying what they 

were buying to begin with. 

The cost of living measure would take that into account. The 

Consumer Price Index, which is based on tracking the cost of a 

fixed market basket of goods and services, historically has not. 

There are a whole set of other issues related to trying to track 

the cost of living, which have to do with how you take into account 

changes in the quality of goods and services. That’s all very difficult. But, in principle, what you would want to do for a cost of 

living measure would be the same as what you want to do with 

putting together the Consumer Price Index. 

Maybe one other comment: When we talk about the Consumer 

Price Index, we describe it as an upper-bound approximation to a 

cost of living index; a particular cost of living index. It’s the cost 

of purchasing the things that people buy out-of-pocket, assuming 

that nothing is changing in the environment, that taxes are not 

changing, that the quality and quantity of public services provided 

is not changing. So it’s an approximation to one particular cost of 

living measure. 

Mr. SNOWBARGER. Would it be fair to say that a number of the 

criticisms that came out of the Boskin report are basically criticizing CPI for not being a cost of living index, as it should be, or 

as they would envision it to be? 

Ms. ABRAHAM. The discussion of substitution bias is really that. 

Mr. SNOWBARGER. Well, substitution bias, but also trying to figure out these decisions, how people both substitute outlets and 

goods in their buying patterns. 

Ms. ABRAHAM. Yes. All of these issues relate to things that, in 

the commission’s view, would need to be addressed to make the 

index more closely approximate the cost of living. 

Mr. SNOWBARGER. One of the concerns that I have is how long 

all this seems to take. I mentioned in my opening statement the 

Stigler Committee report back in 1961, and then I also think I read 

last night, in perhaps testimony that you gave to another committee, maybe it was the Budget Committee, that there are certain 

things that your office has had under consideration for as many as 

10 years. 

30

Can you explain? I will try to locate the statement for you, but 

that maybe you have been looking at the substitution question for 

that period of time. 

Ms. ABRAHAM. It may not be 10 years, but I understand the 

thrust of your broader question. 

Mr. SNOWBARGER. The broader question is—well, let’s take the 

Stigler Committee report. Can you tell us what BLS has, indeed, 

addressed in changing things over the last—well, I guess that 

would be over 30 years. 

Ms. ABRAHAM. Thirty-five years. 

Mr. SNOWBARGER. Thirty-five years. In trying to address that 

committee’s concerns, and then, like I said, it seems like there has 

been some anticipation of problems that the Boskin report brought 

out for a long period of time, whether it’s a decade or not. Maybe 

just address the timeframe. 

Ms. ABRAHAM. Let me try to do that. As I read the Stigler Committee report, the main issue with which it was concerned was the 

representativeness of the set of items that were being priced for the 

Consumer Price Index at that time. 

At that time, as most countries still do, the United States put the 

Consumer Price Index together by drawing up a list of specifications of items to price, and then sending people out to collect prices 

for those things. There is a concern, if you do that, that what you 

end up pricing isn’t going to be representative of what people actually purchase, and the Stigler Committee report was very concerned with that. 

In response to that report, the Bureau of Labor Statistics went 

through a period of research and, in 1978, implemented a fundamental change in the way we put together our Consumer Price 

Index, which involves going out and doing surveys to find out 

where people shop, going into those stores and taking steps to ensure that the items that are priced are representative of what people are actually buying in those stores. 

So there was really a fundamental rethinking of how we put the 

index together that, in my view, is very important to the quality 

of the index. I think, in that respect, what we do is ahead of, better 

than what any other country I’m aware of does. 

Mr. SNOWBARGER. Right. And I guess—not to interrupt—well, I 

am interrupting. Sorry about that. 

Ms. ABRAHAM. That’s OK. 

Mr. SNOWBARGER. My concern is that we have a 1961 committee 

report, and here we say that in 1978 we made dramatic changes. 

That’s 17 years. 

Ms. ABRAHAM. Right. These are very complicated programs. 

Mr. SNOWBARGER. I guess that’s what I need to have explained 

to me. Why does it take so long to make the adjustments once 

these potential inaccuracies or biases are pointed out? 

Ms. ABRAHAM. I wasn’t here. I was in elementary school in 1961. 

So I can’t speak to all that was going on over that period of time. 

Mr. SNOWBARGER. I understand. 

Ms. ABRAHAM. But I do know, again, from looking at the report, 

that although it contained ideas about issues that needed to be addressed, it didn’t have a blueprint for how to go about doing that. 

There was an awful lot of thinking that had to go on between the 

31

time this issue about representativeness of the items being priced 

was raised, and that got thought through, and procedures that it 

would be possible to put in place were developed, funding for implementing those procedures was received, and so on. 

It seems like a long time. I’m not sure, given what was involved, 

that it could have been a lot shorter. There are issues that probably are more pertinent to the current discussion, though, and 

maybe I could speak to those. 

Mr. SNOWBARGER. I’ve really run out of time. I will take the 

chairman’s prerogative to allow you to answer my question, then 

we will go to Mr. Towns. Go ahead, if you want to talk about the 

more current issues. 

Ms. ABRAHAM. Other issues that were raised, and have been 

around for a long time, have to do with substitution bias and the 

quality of goods and services that are purchased, as well as new 

goods that come on the market. 

With respect to the substitution bias, the Bureau, in the context 

of the 1978 CPI revision, took some steps that subsequently have 

led to our being able to estimate the magnitude of substitution 

bias. The surveys that collect the data that have allowed us do that 

got put in place in 1982, and over some subsequent period of time, 

we have been able to analyze those data. 

You need a long time series to figure a lot of that out. So that’s 

part of the answer on just generating the information as to how important that effect was. It has been well known that the CPI, because it tracks the price of a fixed market basket of goods and services, didn’t take that into account. 

The Stigler Committee report talked about quality in new goods. 

Other people have talked about quality in new goods and how you 

adjust for those. This really is a case where recognizing there is an 

issue and having ideas that let you do something about the issue 

are quite different things. I would say, at this point, that we do not 

have, from the economics profession, from other experts who might 

be able to advise us, from our own work, tools and techniques that 

would let us address the issues that have been raised. 

Mr. SNOWBARGER. Thank you. 

Mr. TOWNS. Thank you very much, Mr. Chairman. 

Is there evidence that some groups in our society, such as the elderly, face a higher rate of inflation? If so, how does the Bureau 

of Labor Statistics adjust for this higher inflation? 

Ms. ABRAHAM. That is something that we know, I would say, relatively little about. The CPI, as you know, is an average measure 

that covers the whole population, the whole urban population. 

Some years ago at the request of the Congress, we began producing 

an experimental Consumer Price Index for the elderly. We did that 

by taking data that we had collected for the regular CPI and just 

reweighting it in accord with the pattern of expenditures of elderly 

consumers. 

That index has, over the period for which we have produced it, 

tended to go up a little bit more rapidly than the overall index, 

maybe three-tenths of a percentage point per year, largely because 

of the higher share of medical expenses in elderly consumers’ budgets. 

32

But there are some real caveats to interpreting that measure. We 

didn’t go out and do special surveys to find out just where elderly 

consumers shop, so the stores we go to are the stores where everyone shops. And when we went into those stores, we didn’t collect 

data on the items that elderly consumers were buying. So I think 

that there are some real caveats as to how accurate this measure 

is. 

There is also an issue in that we know that it’s very difficult, to 

adjust appropriately for the changes in the quality of medical care 

that have occurred over time in tracking the cost of medical care. 

The bigger share of medical care expenses is the main reason why 

the experimental index for the elderly has gone up more rapidly 

than the overall index. 

Mr. TOWNS. So then would you agree that we should get more 

information before we move forward? 

Ms. ABRAHAM. I would not presume to give you advice as to what 

the right policy course might be. I can describe for you the information we have, but I wouldn’t presume to advise you as to what you 

ought to do with it. 

Mr. TOWNS. I think the point I’m making is, it seems to be somewhat incomplete. That’s the point I’m making. I mean, even with 

the information that we have. 

Ms. ABRAHAM. Yes. We put together the best measure we could 

construct, given the information we had and absent extra resources 

to go out and construct a whole new index. There are some caveats 

attached to it. 

Mr. SANDERS. Would the gentleman yield for a second on that? 

Mr. TOWNS. I would be glad to yield. 

Mr. SANDERS. I think Mr. Towns raises, to me, what is perhaps 

the most important point, and I’m a little bit surprised by your answer. How many people are on Social Security in America? What 

do we have, 40 million; 35 million people? Many of them are struggling just to survive on $7,000 or $8,000 a year. Mr. Towns suggests, and I would tend to agree with him, that perhaps the current CPI underestimates their increased costs. 

Then when he asked you if you’ve looked at that, you say we 

know very little about it. Gee whiz, I mean, a lot of people in 

Vermont are barely getting by. I would hope that we would know 

a lot about it and you would be able to tell us, yeah, the CPI for 

seniors is X or Y. How come we know very little about this very 

important issue? 

Ms. ABRAHAM. This is an issue in which the Congress has been 

interested. We do, as I indicated, produce an experimental measure. To go out and collect the data that would be required to 

produce a measure that didn’t have these caveats would mean increasing the number of elderly people that we interview to find out 

where they shop; when we go into stores, trying to figure out which 

items they are purchasing; and separately tracking the prices of 

those items. 

You would really be talking about, in essence, duplicating the 

whole program of data collection that we have in place to produce 

the Consumer Price Index. 

Mr. TOWNS. Well, I think, in a growing population, we need to 

take another look at this. But anyway, I’m going to move on. 

33

Would you agree with Dean Baker, who is a well-known economist at the Economic Policy Institute, who is going to be here—he’s 

in the room now—on our next panel, that if the CPI has been significantly overstating inflation, we would need to throw out much 

of the economic research carried out over the past 40 years? Do you 

agree with that? 

Ms. ABRAHAM. Clearly, if the CPI is dramatically overstated, 

then a lot of what we think we know about the rate of growth of 

real wages, and so on, needs to be modified. 

Mr. TOWNS. I’m happy to hear you say that. Let me just ask one 

other question. I know my time is up. 

Mr. SNOWBARGER. Go ahead. 

Mr. TOWNS. Go ahead? OK. Thank you. 

Let me just say, you argue persuasively that the Bureau of Labor 

Statistics has made adjustments to the CPI to reduce much of the 

formula bias problems. You make a strong argument, but how do 

you account for the fact that many of your colleagues disagree with 

you, including the advisory commission? Why do you think they 

disagree? 

Ms. ABRAHAM. Different people can look at the same evidence 

and end up reaching different conclusions about it. 

Mr. TOWNS. That further points out what Mr. Sanders said. That 

part sort of frightens me. 

Ms. ABRAHAM. Let me try to be clear on that. There are some 

pieces of what has been looked at that I think there is general 

agreement about. The CPI is tracking the cost of a fixed market 

basket of goods and services, and we know that that’s going to tend 

to mean, because it doesn’t take substitution behavior into account, 

it’s going to tend to overstate what’s happening to the cost of living. 

We can agree about that. 

We also can agree about how to measure that effect. I don’t have 

numbers at this point. By the end of the year, when we’ve made 

our decisions about the use of the geometric mean formula in the 

index, we will have an estimate of both upper level and lower level 

substitution bias. I think, at that point, we will not only be able 

to agree there’s an issue, we will be able to agree on the magnitude 

of the associated bias. 

It’s when you get into talking about things like quality change, 

new goods, new kinds of outlets that different people looking at the 

evidence can end up in a different place. From my point of view, 

the evidence is quite sparse, and it’s hard to draw firm conclusions. 

Mr. TOWNS. Let me go to my real question, and then I am going 

to yield. 

Ms. ABRAHAM. These were just warm-ups? 

Mr. TOWNS. As we talk, right as we speak, the leadership of our 

Nation are currently considering legislative changes to the CPI. As 

a way to reduce the Federal budget deficit, what would you recommend to these negotiators? 

Ms. ABRAHAM. I would have no recommendation. My role, as I 

see it, is to try to describe, as accurately as I can, what kind of a 

measure the Consumer Price Index is, if that’s something people 

are interested in. It would not be appropriate for me to get involved 

in discussions about how that measure was going to be used. 

34

Mr. TOWNS. Let me try one other thing. Let me try one other 

way, Mr. Chairman. 

Mr. SNOWBARGER. Good luck. 

Mr. TOWNS. Thank you. 

What would a downward adjustment of the CPI of 1.1 percentage 

points per year, as recommended by the advisory commission, 

mean for middle-income families, senior citizens, and the poor? 

Ms. ABRAHAM. That’s not something we’ve done any calculations 

on. The Congressional Budget Office might have done such calculations or the Council of Economic Advisers. You would have to go 

to someone else. We don’t have that sort of information. That gets 

into the use of the index, and that’s not something we’re really involved in. 

Mr. TOWNS. Mr. Chairman, I yield back. 

Mr. SNOWBARGER. Thank you, Mr. Towns. 

I would announce to the committee that we are going to go with 

10 minutes worth of questioning. I think I overstepped my time 

limit, so we will grant that to everyone else. And with Chairman 

Shays’ approval, I think we will go on down the line. 

Mr. Waxman, would you care to question? 

Mr. WAXMAN. Thank you very much. 

Today’s newspapers report that, in the budget negotiations, there 

is talk about building in an assumption about what the CPI adjustment may be, based on your recommendations yet to be determined. 

Ms. ABRAHAM. So I read in the paper. 

Mr. WAXMAN. And there has even been talk about a 0.5 reduction. Do you know what professional judgment went into the conclusion by some people in these negotiations that there ought to be 

a 0.5 reduction? 

Ms. ABRAHAM. No, I don’t. 

Mr. WAXMAN. Were you consulted on this number? 

Ms. ABRAHAM. I certainly have had conversations with other officials in the executive branch and on the Hill concerning things we 

have planned, what the potential impact of things we have planned 

on the index might be, things that we are unlikely to be able to 

correct in the monthly index, and what the bias associated with 

those things might be. I’m thinking of the upper level substitution 

bias, in particular. 

I don’t know what the basis for someone thinking that things we 

would do would slow the rate of growth of the index by half a percent per year might be. 

Mr. WAXMAN. Well, it seems unusual to me that the people who 

are the technical experts are now being consulted but not listened 

to. And it appears it’s a political judgment that may be made in 

these negotiations. 

You indicated, if there is no change in the law that mandates a 

different adjustment, you may be coming up with an update of the 

CPI including use of a geometric mean index, and this may reduce 

the CPI, if at all, up to a quarter percentage point. Is that correct? 

Ms. ABRAHAM. Probably not that much. I say that for the reason 

that it’s unlikely that we would adopt the geometric mean formula 

across the board. It would be slowing the index by a quarter percent per year if we did adopt it across the board. 

35

Mr. WAXMAN. So that would be the maximum we might possibly 

see. 

Ms. ABRAHAM. Based on the evidence we have as to the effect of 

doing that, that’s right. 

Mr. WAXMAN. And then would this change be incorporated into 

the CPI? 

Ms. ABRAHAM. Yes, it would. 

Mr. WAXMAN. Could you walk me through the timing of that? 

You indicated you are going to make some announcement in January 1998. 

Ms. ABRAHAM. We hope by the end of this year, this calendar 

year, so December 1997 or January 1998, to be able to make an 

announcement as to the change we have decided upon. We would, 

at that point, be able to provide an estimate, based on historical 

experience, of the likely impact of what we’re proposing to do on 

the growth rate of the index. 

Our historical practice is to give users of the data substantial advance notice of changes we’re going to make in the CPI, to consult 

with our business and labor research advisory committees. It has 

also been our historical practice to make changes effective with 

data for January, so that it’s at the start of a calendar year. Following that precedent, I would think the most likely date for making a change would be January 1999. 

Mr. WAXMAN. If you made that change in January 1999, would 

it be fair to say that the earliest savings would be incorporated in 

the year 2000, or later? 

Ms. ABRAHAM. I have, to be honest, only a limited understanding 

of how all of these indexation formulas work. Based on what I 

know, that sounds correct. 

Mr. WAXMAN. So we see no budget savings to be realized as a 

result of any adjustment in 1998 or 1999, and therefore any budget 

agreement that contains budget savings of 0.4 or 0.5 percent reductions in CPI in 1998 and 1999, would result not from a BLS decision but from a political decision by the budget negotiators. 

Ms. ABRAHAM. I can’t think of anything that we are likely to do 

that would have any immediate impact on the rate of growth of the 

CPI, other than introducing the new, updated market basket in 

January 1998, which we announced a long time ago, and which I 

think is already well taken into account in people’s thinking about 

the budget. 

Mr. WAXMAN. So would you agree that, if there is to be savings 

in a CPI adjustment, it would have to be through legislation that 

mandates it, not through BLS? 

Ms. ABRAHAM. As I said, there is nothing that we have planned 

between now and January 1999, that I would anticipate would 

have an impact on the rate of growth of the index. 

Mr. WAXMAN. Thank you very much. 

Thank you, Mr. Chairman. I yield back the balance of my time. 

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Mr. SNOWBARGER. Mr. Shays. 

Mr. SHAYS. Mr. Chairman, I got here late because I was testifying before some other committees. I’m really happy to have my 

colleagues ask questions. I would suggest this is such important 

testimony that Members may want to have a second round. So I’m 

not asking to get the last word, but I will let my colleagues go 

ahead of me. 

Mr. SNOWBARGER. OK. 

Mr. Sanders. 

Mr. SANDERS. Thank you very much, Mr. Chairman. 

Let me restate a concern that I have. I think that it is not an 

accident that there is such a preoccupation with the CPI. I frankly 

believe, as others have implied, that this is a back-door way to balance the budget. I think it’s a cheap way. I think it’s a vulgar way. 

And I think it’s going to come down on the backs of the elderly and 

the poor, rather than look at corporate welfare, military spending, 

tax breaks for the rich. 

There are some people who think they can save a few bucks by 

telling a senior citizen in Vermont, who is trying to survive on 

$7,000 a year, ‘‘We can take away $100 from you.’’ And I think that 

stinks. 

No. 2, I wrote to Bob Reich a while ago, because this whole issue 

of how you develop statistics is so very important. We hear a whole 

lot of statistics floating out there. And what we’ve been hearing for 

the last year, every time you read the newspaper, is, the economy 

is booming. Right? The economy is doing great. 

Yesterday we learned that the CEOs of major corporations saw 

a 54 percent increase in their compensation. So I’m sure the economy is doing very well for them. And yet I read today, on page A– 22 of the Washington Post, about the Employment Cost Index. 

Now, that is, as I understand it, the cost that an employer incurs 

in terms of wages and benefits. 

Now, what it says in the Washington Post, and the information 

comes from the Labor Department, is that for the 12 months ending in March, the ECI was up 2.9 percent, the same as for the year 

ended in December, 2.9 percent. That tells me that for workers, in 

fact, their total wages and benefits went below the cost of inflation. 

What was inflation last year, over 3 percent? 

Ms. ABRAHAM. I don’t have those figures here. 

Mr. SANDERS. I thought it was 3, 3.5 percent. Anyone have that? 

Ms. ABRAHAM. No, it was not 3.5 percent; it was 3.3 percent. 

Mr. SANDERS. OK. So, in fact—and here’s the point, colleagues on 

the committee. When we hear so much about there’s a booming 

economy, what these statistics tell us is that, for workers, their 

wages and benefits, in fact, did not even match inflation. 

And if you take another step and understand that that’s a mix 

of upper income employees, the CEOs, and your $20,000 or $15,000 

a year employees who do worse, what you can probably argue is 

that, for low-wage employees, their standard of living has continued to decline precipitously. 

Ms. ABRAHAM. The CEOs probably aren’t in there, but I don’t 

think that changes your basic point. 

Mr. SANDERS. At what level would you go? Is the basic point that 

I’m making correct? 

49

Ms. ABRAHAM. The basic point that the Employment Cost Index 

is an average across all wage and salary workers is correct. 

Mr. SANDERS. OK. And if he makes $100,000 a year as a middle 

level manager, and I make $15,000 a year, you’re going to average 

those two in. Statistics would indicate that the people who are 

making $100,000, even if they are not CEOs, are doing pretty well. 

Would it be fair to say that, based on these statistics, the average 

worker, say, making $25,000 a year or less, his or her compensation has not matched inflation? 

Ms. ABRAHAM. There is some information in the Employment 

Cost Index on what’s happening to the hourly costs of labor, for, 

for example, production workers, administrative workers. It’s broken out by occupation. The rates of growth for the different occupation groups haven’t looked terribly different. 

Mr. SANDERS. All right. But based on these statistics, which say 

that overall it’s a hair below inflation, combining everybody, everything that I have read indicates that the higher paid people are 

doing better than the lower paid people. Is my assumption correct 

that for, say, lower-paid workers, $25,000 a year or less, they are 

continuing to fall below the growth rate of inflation? 

Ms. ABRAHAM. I’d want to take a look at the data, but you certainly are correct that over the period since the late 1970’s, there 

have been increases in the inequality of earnings. 

Mr. SANDERS. Well, the point that I’m trying to make is that 

every day we hear about how the economy is booming, and it seems 

to me, reading the statistics, what we’re finding out is that perhaps 

for the majority of workers, their revenue, their compensation falls 

below the rate of inflation. 

I would strongly urge, and I had urged this of Bob Reich, is that 

I think the one statistic—and I know your job is a very difficult job, 

it really is. I mean, having to balance southern California and 

northern Vermont, those are two different worlds, and you’ve got 

to come up with some match, and it’s hard, I know that. And you 

probably get criticized no matter what you come up with. 

But I would think that really what we need in this country is one 

statistic which tells us how the average working person is doing, 

and get that statistic out. Because I think there is a lot of confusion in matching the incomes of upper income people with the incomes of the vast majority of the people. You add them together, 

and you divide by half, you know. If I’m making $1 million a year 

and he’s making $10,000 a year, on average, we’re making a half 

million dollars a year, but our reality is a little bit different. 

I think, if you did that, the statistics would show that the economy, despite what the President is saying, and despite what other 

people are saying, is not booming, but that the middle class and 

the working class of this country are hurting and hurting very 

badly. 

I would hope very much you would work on that statistic. What 

is life like now? How is the average working person in this country 

doing, comparing compensation, what’s coming in, and what they 

are paying for. I would hope that we can get that statistic. 

The second point, picking up on a point that—and maybe we can 

talk about that at some other point. 

50

Ms. ABRAHAM. I was going to say, we do have data that you 

might find of interest, and I would be happy to sit down to discuss 

it. 

Mr. SANDERS. Are you advertising that data? Does it get into the 

newspapers much? 

Ms. ABRAHAM. We have very little control over what gets into the 

newspapers, sir. 

Mr. SANDERS. Well, what I hear is that the economy is booming, 

and I would perhaps like some statistics to suggest that, for the 

working class of this country, the economy is not booming. 

Ms. ABRAHAM. I don’t know what the statistics suggest precisely, 

but we do have information that you might find of interest on earnings by decile of the earnings distribution, and so on. 

Mr. SANDERS. I will give you a ring, and perhaps we can discuss 

that. 

Ms. ABRAHAM. Good. 

Mr. SANDERS. OK. Now, my third point again, picking up on the 

point Mr. Towns made a while back, if we just look at the issue 

of Social Security and 35 million Americans who receive Social Security, many of them are heavily dependent upon that Social Security check. And it would seem to me to be incumbent upon the Bureau to come up with some good statistics for those folks. And if 

it requires some money to do that type of study, then I think we 

should invest that money. 

I think, as Mr. Towns and many people have pointed out, there 

is at least some evidence to suggest that because seniors are more 

dependent upon health care, seniors need warmer homes, for example—you know, when you get old, you need to keep your house a 

little bit warmer—that what seniors depend upon may be going up 

faster than the general cost of inflation. 

Given that we have 35 million people on Social Security, I think 

that that is an area that we can focus on. Can we expect some 

work in that area of devoting money and energy to come up with 

a good statistic for seniors? 

Ms. ABRAHAM. That’s certainly something we could go back and 

take another look at. This was discussed, it is my understanding, 

at the time that Congress first expressed an interest in a CPI for 

the elderly. I don’t know the ins and outs of why it was not decided 

to go forward with a separate index. As I did indicate, it would 

have amounted to essentially duplicating our entire program of 

producing the CPI. For whatever reason, we didn’t end up doing 

that. 

Mr. SANDERS. Let me ask you a question: When you come up 

with the CPI, which impacts on Social Security, correct? 

Ms. ABRAHAM. Mm-hmm. 

Mr. SANDERS. How many seniors do you get information from? 

Ms. ABRAHAM. Our samples of people who are surveyed for the 

consumer expenditure surveys are a rolling panel of about 5,000 

households, and seniors would be represented in those samples in 

proportion to their share of the urban population. 

Mr. SANDERS. Which is? This is urban, which is roughly what? 

Ms. ABRAHAM. It’s the urban population, which is about 80 percent of the total population. But I should add to that, when I said 

51

that they would be represented; we then take expenditure weights 

from that overall survey and use them to construct the CPI. 

We actually have two CPIs. We have a CPI for all urban consumers, and we have a CPI for urban wage earners and clerical 

workers. 

Older people’s expenditures, older urban consumers’ expenditures, are represented in proportion to their share of total expenditures in the CPI–U, which is used, for example, to adjust tax 

brackets. 

Mr. SHAYS. Excuse me. I’m sorry to interrupt. Could someone 

just shut the door. 

Ms. ABRAHAM. We also have a separate CPI for urban wage earners and clerical workers, which includes essentially no elderly individuals. For reasons of historical accident, that’s the index that 

gets used to adjust Social Security. So older people are not represented at all in that index. 

Mr. SANDERS. I would think—I mean, unless I’m missing something here—that given, again, the fact that we have 35 million seniors, I think that they deserve to have an independent assessment 

of their particular needs, which I happen to think will show that 

the CPI underestimates their needs. 

I would hope very much that that’s something that we can move 

toward. And if it requires extra money—I know some of us have 

talked about that—we’re prepared to vote for that money for the 

studies that you may need. But I think that we do need an independent look at the needs of our seniors. 

With that, I yield back. Thank you, Mr. Chairman. 

Mr. SNOWBARGER. Mr. Barrett. 

Mr. BARRETT. Thank you. Thank you for holding this hearing. 

One of the things that surprised me was your comment that, if 

you were going to do a separate study for seniors, you would have 

to duplicate the entire survey. It strikes me as though there is a 

core element of products or of living costs that are going to be consistent regardless of your age, and that you would make some additions and some subtractions, based on a person’s age. 

Ms. ABRAHAM. It may be, if we really got into it, that we could 

find some overlap of that sort. What I had in mind when I said 

that was that we would have to greatly expand our consumer expenditure survey to get a better fix on how elderly individuals 

spend their money. We would have to do a separate or at least 

much augmented survey to find out where they shop. When we 

went into stores, we might find ourselves in many of the same 

stores, but we might find ourselves in different stores. It might be 

that, when we went into the stores that overlap, we would find elderly consumers buying the same things; it might be that we 

wouldn’t. 

So you are right that there might be some overlap in the end in 

what we ended up tracking, but we would have to do separately a 

lot of the work that would be involved. 

Mr. BARRETT. I’m going to show my ignorance about the Consumer Price Index. For example, housing, what are the factors? Is 

it mortgage rates or rents? 

Ms. ABRAHAM. No. This may be something I should have mentioned when Mr. Snowbarger was asking earlier about how we reVerDate Jul 17 2002 11:01 Jul 18, 2002 Jkt 079971 PO 00000 Frm 00055 Fmt 6633 Sfmt 6602 W:\DISC\42460 pfrm20 PsN: 42460
52

sponded to the Stigler Committee report. We used to track housing 

costs by tracking the kinds of things you are referring to, looking 

at actual outlays on housing, if you will. 

But that proved to be unsatisfactory, for a variety of reasons, and 

a decision was made in the late 1970’s, and then implemented in 

the early 1980’s, to move to a so-called ‘‘rental equivalence’’ approach to tracking housing costs. This essentially means that, for 

people who own their own homes, we try to match those housing 

units up with rental units, and track what’s happening to the cost 

of the rental units. What we’re saying, in effect, is that the cost of 

living in their own home is the amount of rent that they are giving 

up by not renting it out. 

In the long run, if mortgage rates went up, that presumably 

would affect the rents that get charged in the housing market and 

then would show up in our measure. But it’s not a one-for-one 

thing. We don’t track interest rates directly, for example. 

Mr. BARRETT. That confuses me even more. You can see why I’m 

not a statistician. 

Ms. ABRAHAM. It’s very complicated. 

Mr. BARRETT. So if you’re in an area where there is a rapidly increasing housing market, how is that reflected then? 

Ms. ABRAHAM. Where prices of homes are going up? 

Mr. BARRETT. Right. 

Ms. ABRAHAM. That would be reflected, indirectly, to the extent 

that it showed up in higher rents being charged for rented housing 

units in that area. 

Mr. BARRETT. OK. 

Ms. ABRAHAM. If it didn’t show up in rents, it wouldn’t be reflected in our measure. 

Mr. BARRETT. OK. Again—and excuse me for trying to understand this, which may be dangerous—if you live in the area—I represent, part of Milwaukee, and we have suburban areas where the 

price of housing is going up. We have elderly who don’t live in 

those units, primarily. They will live in areas where the price of 

housing is stagnant or even dropping. What type of bias will that 

create? 

Ms. ABRAHAM. For the measurement of housing costs for the elderly? 

Mr. BARRETT. For the measurement, yes. 

Ms. ABRAHAM. Well, the CPI is really an average measure. So it 

would track the average, what was happening to rents on average, 

but it isn’t necessarily going to give you a very good reflection of 

what’s happening to rents for particular groups. 

Mr. BARRETT. OK. 

Ms. ABRAHAM. Which is true, in general, about the CPI. It’s an 

average. It doesn’t necessarily reflect the experience of particular 

groups. 

Mr. BARRETT. You mentioned, or I thought I heard you mention, 

that the substitution factor index would overstate. 

Ms. ABRAHAM. Because the CPI doesn’t take into account consumers’ ability to substitute. 

Mr. BARRETT. Give me an example, please. 

Ms. ABRAHAM. Perhaps a small example, if consumers are purchasing two kinds of lettuce, they are purchasing Romaine lettuce 

53

and red leaf lettuce. And if, for some reason, the relative price of 

Romaine lettuce goes up, they would buy less Romaine lettuce and 

more red leaf lettuce. 

What that would mean is that, in order to get lettuce that gave 

them the same value, if you will, they wouldn’t have to spend as 

much in total lettuce as they would have if they had just kept buying the same amounts of Romaine and red leaf lettuce as they 

bought to begin with. 

Mr. BARRETT. So does your original index just use generic lettuce? 

Ms. ABRAHAM. No, we price specific items. So we might be tracking the cost of, you know, a pound of Romaine lettuce. That might 

be one of the specific items in the index. So we wouldn’t take that 

kind of substitution into account in our index. 

That’s the reason why we’re looking at possibly adopting a new 

formula, the geometric mean formula for constructing the subindexes in the CPI. At least under certain assumptions, it would 

give us a better approximation as to what consumers were actually 

doing at that level. 

Mr. BARRETT. I also heard, when Mr. Waxman was asking questions about your timetable and the analysis that you have done, I 

thought I heard you mention the figure a quarter of a percent. Is 

that accurate? 

Ms. ABRAHAM. That’s correct. 

Mr. BARRETT. And you were referring there to what? 

Ms. ABRAHAM. I was referring there to the upper bound on the 

potential impact on the rate of growth of the index of our switching 

over to using this new geometric mean formula in putting together 

the subindexes. If we did it in all parts of the index, our research 

indicates that the rate of growth of the index would slow by about 

a quarter percent per year. 

We are unlikely to adopt it in all parts of the index. There are 

some components where it seems appropriate. If relative prices of 

Romaine and red leaf lettuce change, people will substitute. For 

prescription drugs, it’s probably not appropriate. If the price of 

ulcer medication goes down and the price of heart medication goes 

up, the fact that ulcer medication costs less doesn’t help me much 

if I’m a heart patient. 

Mr. BARRETT. OK. But you’re saying overall the change will be 

a quarter percent? 

Ms. ABRAHAM. Overall, the change will be something less than 

a quarter percent per year, because we won’t make the change 

across the board, most likely. 

Mr. BARRETT. OK. And, again, now shifting gears to the political 

world, the article that referred to a 0.4 or 0.5 change, is one of the 

articles that I saw. Is it accurate to say, then, that any change—

and we will use a quarter of a percent, or 0.25 percent—beyond 

that would be more of an arbitrary decision? 

Ms. ABRAHAM. Not necessarily. There isn’t anything that we are 

likely to do in the CPI itself that would take effect right away or 

that would have as large an effect as—I don’t know where this 0.4 

number is coming from. 

It is, however, well agreed, and I would agree, that the CPI tends 

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cause it doesn’t take substitution behavior into account. We will 

have an estimate by the end of the year of how big we think the 

lower-level substitution bias is, although it will take us some time 

to implement the change we think is appropriate in the index. 

We have now an estimate of how big the upper-level substitution 

bias is. That’s substitution bias associated with shifts in consumption across item categories, in response to relative price change. 

That, for reasons you may or may not want to get into, is really 

not possible for us to deal with in the context of producing a 

monthly index. But we could give you an estimate, if you wished, 

of how big that is. 

So there are some things, I think, where we can agree. We can 

even quantify what the bias in the CPI is. Going beyond that, I 

think, there is more dispersion of opinion. 

Mr. BARRETT. You also mentioned that you’re going to have a 

new market basket in January 1998. Can you tell me what the 

major changes are in the market basket? 

Ms. ABRAHAM. Gosh, it’s been a while since I looked at that. It’s 

an updating of the expenditure shares from 1982 to 1984, to 1993 

to 1995. 

We’ve seen some increase in the share of consumer electronics, 

and related items, over that period. Personal computers, for example, weren’t particularly important in 1982 to 1984, and they will 

be somewhat more important in the new market basket. Medical 

care, perhaps surprisingly, is a smaller share of out-of-pocket expenditures than it was in 1982 to 1984. 

I can give you, for the record, if you would like, a more complete 

breakdown of how it’s changed. 

Mr. BARRETT. I would appreciate that. 

I would yield back my time. 

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Mr. SNOWBARGER. Thank you, Mr. Barrett. 

Mr. Shays. 

Mr. SHAYS. Thank you, Ms. Abraham. It’s very nice to have you 

here. I was thinking, in some ways, you have an extraordinarily 

powerful position. I would just like to understand a few things 

about your office. And I just want to say, I have no hidden agenda 

in my questions. I do in some cases, but not as you coming before 

us. 

Ms. ABRAHAM. Good. I’m glad to hear that. 

Mr. SHAYS. I start with the premise that whatever a senior’s cost 

of living, that’s what it should be. It shouldn’t be less, or it 

shouldn’t be more. And then I would say to my colleague from 

Vermont that, if, in fact, we should be providing more, then that’s 

something we should do legislatively, if we feel that it’s not enough, 

that it has to be something more than the cost of living. And I 

would also agree with my colleague from Vermont, if the cost of living is not truly representing their true costs, then it should be adjusted. 

I just want to first understand your office. And I don’t mean this 

in disrespect, because I happen to like politics, but I make an assumption that the Commissioner’s position is an appointed position. 

Ms. ABRAHAM. It is. 

Mr. SHAYS. But I also make the assumption that you basically 

have a fairly large staff that assists you in doing your tasks. And 

your task isn’t just doing CPI; it’s a lot of other things. I’d like you 

just to give me an idea of what some of the other responsibilities 

are. 

Ms. ABRAHAM. Certainly. I should clarify, perhaps. I am appointed to my position for a fixed term, a 4-year term. 

Mr. SHAYS. Which is how long? 

Ms. ABRAHAM. A 4-year term. 

Mr. SHAYS. And is it a reappointed position or is it one time? 

Ms. ABRAHAM. The historical precedent has been that Commissioners of Labor Statistics are reappointed. The agency has been 

around for more than 110 years, and I’m the 11th Commissioner. 

Mr. SHAYS. And regardless of party, in other words? 

Ms. ABRAHAM. Right. 

Mr. SANDERS. You like that tradition, right? 

Ms. ABRAHAM. I think that’s the appropriate tradition. Even 

aside from my personal interest, I think that’s the appropriate tradition. 

Mr. SHAYS. But the bottom line is, a Republican President might 

appoint a Democrat, a previous appointee, or vice-versa. 

Ms. ABRAHAM. The prior Commissioner was Janet Norwood, who 

was appointed by President Carter and reappointed twice by President Reagan. 

You asked about the other things that the Bureau does. We have 

responsibility for, in addition to price statistics, which includes the 

Consumer Price Index, the Producer Price Index, and export and 

import prices indexes. We are responsible for employment and unemployment statistics; the payroll employment numbers and the 

unemployment rate that will be coming out on Friday are produced 

by us. 

77

We are responsible for information on wages and working conditions. That includes the Employment Cost Index we were discussing earlier. We produce the Government’s official productivity 

statistics, and we also have a program that produces employment 

outlook projections. 

Mr. SHAYS. I have always been curious, because in some cases, 

with the CPI, whatever statistic you come with costs potentially 

the taxpayers billions of dollars, or it reduces their costs, or when 

you come up with labor statistics, it has a significant impact on, 

say, the market, the stock market. It obviously has an impact on 

a lot of other decisions. 

Statistics you do with, for instance, the Consumer Price Index, 

we have legislation that says ‘‘plus the CPI,’’ or ‘‘the CPI minus,’’

so I’m interested to know what ethical process or protocol you have 

to just protect the American people from abuse. In other words, 

would some people love to get what your employment statistic is 

a little ahead of the market? 

Ms. ABRAHAM. I’m sure they would. 

Mr. SHAYS. Well, what’s the process? 

Ms. ABRAHAM. There are many things that we do to ensure our 

independence. 

Mr. SHAYS. The process to ensure the integrity that the statistics 

aren’t known to the general public until—I mean, not to individuals until they are generally known to everyone. 

Ms. ABRAHAM. Right. We have a process for all of our sensitive 

economic indicators, and there are a number. The only people who 

see the information before it’s published are people who are working on it directly and have a need to know what the data are showing in connection with their work. 

The data are not shared with anyone outside of the Bureau of 

Labor Statistics until our press release has been drawn up. We 

send the information over to the Council of Economic Advisers, to 

share with the President, late in the afternoon before the data are 

released. 

At 8 o’clock on the morning of the release, press are allowed to 

come into a locked room to look at the data so that they can work 

up their stories, and the data are then released at 8:30 a.m. 

Mr. SHAYS. How many people see the statistics or are aware of 

the statistics, say, before the White House is aware of it? 

Ms. ABRAHAM. Only staff at the Bureau of Labor Statistics. 

Mr. SHAYS. How many would that be? 

Ms. ABRAHAM. I’d be taking a guess, and it would vary, depending on the particular thing we’re talking about. Twenty, maybe. I 

don’t know. If you really wanted to know, I could get numbers for 

you. 

Mr. SHAYS. Well, I would like to know. 

Ms. ABRAHAM. OK. 

Mr. SHAYS. But that will be a followup question. 

Ms. ABRAHAM. I may be off in my guess, and it may also vary 

by which statistics we’re talking about. 

Mr. SHAYS. Has there been any case that’s either been public or 

not been made public where someone has these statistics and has 

provided them to someone else outside? 

78

Ms. ABRAHAM. To my knowledge, there have been no incidents 

where anyone in the market has gotten any of these data ahead 

of time. 

We did have one incident, which we took steps to address immediately, in which some of our Producer Price Index data were put 

up on the Internet overnight, and they were up there for a few 

hours in the night, and we then yanked them back. There were two 

people overseas, researchers as best we could tell, who ended up 

downloading PPI data during that period. We don’t know whether 

they saw the prerelease data. 

Other than that incident, I know of no premature releases, and 

I know of no cases in which people in the market received access 

to data before release. 

Mr. SHAYS. Just say Bernard Sanders would not want me to 

have undue influence over you, or any influence over you, frankly, 

nor would I want him to, based on our perspective. What we require you to do is not really outlined significantly in statute. It’s 

almost common law. It has just evolved over time; is that correct? 

Ms. ABRAHAM. That is correct. I think it would be very hard to 

write down in statute what you want us to do, in that we learn 

new things on an ongoing basis about how to improve our measures. 

Mr. SHAYS. So a lot of the power that you have is over time, it’s 

tradition, it’s practice. 

Ms. ABRAHAM. Yes. That is right. I think that that’s been a very 

effective way of ensuring. 

Mr. SHAYS. No, no. I’m not asking you to pass judgment. I’m just 

trying to understand. 

Ms. ABRAHAM. Right. 

Mr. SHAYS. Because it gets into this whole issue of, ultimately, 

what can the White House do, or what can Congress do to influence 

it. Because I’ve heard statistics of 4.5 percent, as well. 

There is a group of Members of Congress who say that it overinflates the cost and that the Bureau of Labor Statistics is not inclined to change it; therefore, you do need statutory oversight to 

change that, because they are not going to do it internally. 

There is another group in Congress that says—and Senator Moynihan, frankly—I know this sometimes tends to be Republican and 

Democrat, but 2 years ago I was on an airplane with Mr. Moynihan, and he had solved the world’s problems by solving this issue 

of the CPI. So it’s not a Republican or Democrat thing. He really 

believes that it overstates, and he’s a highly respected Member of 

the Senate. 

The issue I’m getting to is that there’s also another group in Congress that believes that you could and should be re-evaluating how 

you determine the cost of living, and you need to act more quickly. 

And they believe that that ranges from 0.2 to 0.5 of a percent. 

What I want to do now is get to what Mr. Waxman was asking, 

and that was, isn’t it true that if you move the—is this my first 

5 or my second 5? 

Mr. TOWNS. Third 5. 

Mr. SHAYS. I’ve done 10. I can go around the next round. 

Mr. SNOWBARGER. Why don’t you go first in this round. 

79

Mr. SHAYS. Yes, and then if we could go around, I’ll take another 

5. 

Isn’t it true that if you moved more quickly on what you are considering, there would be a potential reduction in the CPI of somewhere between 0.2 and 0.5 percent? Isn’t there something in that 

range? 

Ms. ABRAHAM. We have a number of things in the works that I 

described in my opening remarks. The only thing that we are considering to which I can attach even a range, in terms of its likely 

impact, beyond updating the market basket next January, is the 

possible adoption of the geometric mean formula in some components of the index. 

We need some time to think about what it makes sense to do. 

We need to do an evaluation. I think speeding up the timetable for 

making those decisions would be extremely difficult. I don’t know 

how we would do that. I think it’s important, as well, that we proceed at a deliberate pace to make changes. Our past practice has 

always been to give people substantial advance notice of changes 

that we were making, and I think it would be a grave mistake to 

depart substantially from that. 

Mr. SHAYS. I need to understand, because I do have sympathy 

with Mr. Snowbarger’s comment. I’m not sure, in this day and age, 

that we can wait years and years and years. The marketplace 

changes very quickly and I don’t know if Government can be so 

slow. 

I will voice a concern. I feel you are an expert for instance, on 

the issue of breadbasket. I would think, unless I just have a totally 

distorted view of what the breadbasket is, that you would be able 

to almost say without notes exactly what constitutes the breadbasket—market basket, I’m sorry, when you were asked that question, just before I was given the floor. 

I guess what I’m saying to you is, I need to be convinced that 

so much time is necessary. Tell me why. There’s all this data. We 

don’t have to reinvent the data; it’s out there. 

Ms. ABRAHAM. I’m not quite sure exactly what it is you think is 

taking too much time. Maybe I can give you a better answer if I’m 

clearer on that. 

Mr. SHAYS. Well, you’re talking about readjusting how you determine the CPI. 

Ms. ABRAHAM. Using the geometric mean formula in the index. 

Mr. SHAYS. Right. Now, is this something that you just started 

thinking about this year? 

Ms. ABRAHAM. No, we’ve been thinking about this for a couple of 

years. 

Mr. SHAYS. I want to pin you down a little bit. 

Ms. ABRAHAM. In December 1993, we first published an article 

that was authored by Brent Moulton, who is here, that took a look 

at the use of the geometric formula as opposed to what we currently do now. 

It turns out that our understanding of what that formula does 

and how we ought to think about it really has evolved over that 

time. So we are still working on understanding exactly what it does 

and thinking through under exactly what circumstances it might 

be more appropriate than the formula we’re using now. 

80

That was research. It wasn’t a step directly toward making 

changes in the official index. We just published, in March of this 

year—— Mr. SHAYS. With all due respect, even publishing in 1993, December 1993. 

Ms. ABRAHAM. It was a research paper. 

Mr. SHAYS. Right. So you were thinking about it before December 

1993. 

Ms. ABRAHAM. We could ask Brent when he started working on 

the paper. We could ask Brent, who is here, when he started working on the paper. It wasn’t a great long time, is my sense. 

Mr. SHAYS. It almost sounds like a facetious answer. I think you 

get the sense that 1993, or let’s say the beginning of 1994, and 

we’re now into 1997. I just don’t think we have the luxury to wait 

that long. 

What I’m going to do is, I’m going to come back. I’m going to let 

other Members ask questions. 

Ms. ABRAHAM. Could I respond? 

Mr. SHAYS. Sure. 

Ms. ABRAHAM. If we were just talking about knowing what needed to be done and doing it, I would agree, we would want to move 

fast. 

We realized, after publication of Brent’s paper, as we started 

thinking more about his findings, we began to figure out that there 

was this ‘‘formula bias’’ problem that was related to the findings 

he was getting. 

His paper was published in December 1993. In January 1995, 

just over a year later, we took steps to substantially correct that 

problem. We then figured out that we hadn’t got the whole job 

done, and last summer we made the remaining changes that were 

necessary to fix that problem. 

So when it was a matter of realizing that there was a problem, 

figuring out that we could do something to fix the problem and 

doing it, we have moved very quickly. I don’t think that these other 

things that we’ve been talking about are in the category. I don’t 

think we really have thought through where this geometric mean 

formula makes sense and where it doesn’t. And it’s far from a trivial matter to really work that through. 

Research and development, in the private sector, often can take 

a very long time, and what we’re talking about here is much more 

akin to that than just accelerating production cycles. 

Mr. SHAYS. Let me take the second round—I mean, wait till my 

colleagues have asked some more questions. I guess the term 

‘‘fast,’’ I just don’t want us to act slowly. I just feel we need to be 

a little more timely. Maybe some of it requires us to give you some 

more resources. I just think the implications of this—and I know 

you know this—are just extraordinary. 

Just as Mr. Sanders can tell you about what it’s like for seniors, 

I’d like to tell you what I think it’s like for kids, and what I think 

it’s going to be like for kids when they have to pay the bills, if, in 

fact, we are overstating the inflation rate. 

I have some other questions, but let me just come back after 

other Members have had some time to ask some more questions. 

Mr. SNOWBARGER. Mr. Towns. 

81

Mr. TOWNS. I will pass. 

Mr. SNOWBARGER. Mr. Sanders. 

Mr. SANDERS. Let me just make a few points and maybe comment on what Chris Shays said. 

No. 1, it seems to me what I’ve learned today, mostly, Ms. Abraham, it is terribly important that you remain independent and not 

be swayed by political pressure. I think Mr. Shays suggested that 

I am concerned about senior citizens. I am, but that’s not your job. 

Your job is just to come up with the information. It is, in fact, our 

job to make the legislation to deal with it as we want. And I agree 

with Mr. Shays on that. 

But the caveat of that, the other side of that is that because politicians want to balance the budget in a certain way, they may be 

leaning on you to say that the CPI is lower than it is, and therefore 

we can cut benefits. 

I would hope very much that you and your colleagues would have 

the professional integrity to say you’re not politicians, you don’t 

make legislation, but you are going to come up with the best, statistically honest information that you can, and resist any effort to 

force you to go one way or the other. Because we can’t run a government unless we get honest information. I’m sure Mr. Shays 

would agree with that. 

We have to, then, take your information and do with it as, you 

know, we will argue about. But we need independence from you, 

and I would hope that whether its right-wing Republicans or—well, 

there aren’t any left-wing Democrats—but whoever it might be, to 

resist that and just maintain your intellectual integrity on that. 

Do you agree with that? 

Ms. ABRAHAM. Absolutely. And I am very happy to be able to say 

that the Bureau of Labor Statistics has a long, long tradition of 

proceeding independently, based on the best technical judgment of 

the staff. 

Mr. SANDERS. That’s right. OK. And I think we can all recognize 

what a terribly difficult job it is. I’m trying to sit here and think 

that I have a 25-year-old, affluent young man, say, from Los Angeles, and he has spending habits; right? And you have an 80-yearold, low-income person in Newport, VT, who has spending habits. 

They are living in different worlds. And how you balance that, 

that is what your job is about. It’s a tough one, because they are 

living in very different worlds, in terms of what they purchase and 

what their needs are. I would again reiterate, my hope that, to deal 

with that problem, you would put more focus on the needs of senior 

citizens, in particular, especially as it relates to Social Security. 

I am not an economist, and I don’t know all that much about 

substitution theory, so maybe help me out here. If we have, theoretically, somebody who loves to eat steak and hates chicken, OK; 

the cost of steak goes off the wall, the price of chicken goes down. 

So this guy says, ‘‘Boy, I hate to eat chicken, but that’s what I’m 

going to eat, 5 days a week.’’ OK. 

Now, the cost that this person is now spending for dinner let’s 

say has even gone down, spending less money. But he is being deprived, she is being deprived of what he or she enjoys; right? The 

quality of life, if you would like. I’m being a little bit jocular here. 

82

How do you measure that? You can come up with a statistic that 

says Mr. Jones is now spending less for food; however, Mr. Jones 

is not getting what he really wants. His quality of life, in a sense, 

has gone down. As an economist, how do you deal with that? 

Ms. ABRAHAM. We deal with that only in an indirect way, I 

guess. The way that we come up with measures of substitution bias 

in the Consumer Price Index is by looking at what’s happening to 

the relative prices of different kinds of items, different categories 

of items, and then looking at what happens to the relative share 

of aggregate expenditures devoted to each of those different categories of items. 

And we, in effect, draw an inference from what’s happening to 

the pattern of consumption expenditures about the substitutions 

that people have made. 

Mr. SANDERS. I think I understand it, but I think there’s another 

point. And it’s tough stuff, so I’m not being critical here. 

Ms. ABRAHAM. I should say there is a theory that underlies precisely how we do this, but that’s the intuition. When relative prices 

change, we look at how people’s actual behavior changes. 

Mr. SANDERS. But help me out here. If you were just to look at 

the price of steak, which went up, and people were not purchasing 

it, then people would correctly say you’re overestimating what people are spending. Right? The price of steak went up, but they are 

not buying steak. Wouldn’t that be fair? Am I wrong on that? 

If that’s what you did, if you did not look at what people were 

purchasing, you just looked at the price of the product, and no one 

was buying it, your statistic would be irrelevant. 

Ms. ABRAHAM. Right. 

Mr. SANDERS. OK. So, you know, if the price of steak doubled but 

nobody was buying it, we have to take into consideration nobody 

is buying it. OK. But on the other hand, the fact that somebody is 

now buying chicken, which has gone down and people gravitate toward that, how do you measure it? And maybe you don’t, because 

you’re an economist. 

But in terms of quality of life, I can buy substitute products, but 

my quality of life, in a sense, has gone down. I would like to get 

steak. So you could argue, gee, the cost of food has gone down, but 

how do you take into consideration that people are not purchasing 

what they would like to purchase? How does that equate? 

Ms. ABRAHAM. The only information that we really have to work 

with is what people reveal about their preferences, based on what 

they actually buy. 

I would like to make a distinction here with respect to this substitution bias thing. If all that happens is the price of steak goes 

up, then, clearly, people are worse off; the cost of living has gone 

up. This doesn’t change that. All we’re really saying with this theory, this method of measuring, is that if the price of steak goes up, 

the cost of living doesn’t go up as much as it would if you assume 

they kept buying exactly what they were buying to begin with. 

There are some substitutions that they can make to partially offset 

the increase in the price of steak. 

Mr. SANDERS. I agree. I agree with you, absolutely. But what I’m 

asking is, and maybe, as an economist, you can’t do this, how do 

you throw into the equation the fact that somebody is—their qualVerDate Jul 17 2002 11:01 Jul 18, 2002 Jkt 079971 PO 00000 Frm 00086 Fmt 6633 Sfmt 6602 W:\DISC\42460 pfrm20 PsN: 42460
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ity of life, in a sense, has gone down? I mean, steak and chicken 

is a poor example of that. You can get a cheaper product, a substitute product, but maybe it’s not the product that you wanted. 

Has your standard of living gone down, even if it can’t be measured 

in monetary terms? 

Ms. ABRAHAM. We don’t try to talk to people about that directly. 

Mr. SANDERS. OK. I think that might be a little bit of a weakness 

in the substitution theory. Would you agree? 

Ms. ABRAHAM. Well, this theory is based on a certain set of assumptions about people’s preferences, and what they look like, and 

how they respond when relative prices change. I would note, 

though, that the CPI itself is also based on much the same sort of 

assumptions. In constructing this kind of measure, you really can’t 

get away from making some stylized assumptions, I think, and it’s 

going inevitably to leave out how individual people feel about some 

of this, and so on. 

Mr. TOWNS. Would the gentleman yield? 

Mr. SANDERS. Yes. 

Mr. TOWNS. On that point, as he is raising these questions, it 

sort of opens up another area which points out, in terms of my concern, that now we’re getting, in some areas of the country, these 

big outlets where people can go and purchase. And sometimes, of 

course, the price comes down. But senior citizens that might not be 

able to drive can’t get to those outlets, you know. These are factors 

that I think that one would need to consider. Do you look at all of 

these things, as well? 

Ms. ABRAHAM. No. I’m not sure all of what you have in mind, but 

I’m sure we don’t. 

Mr. TOWNS. Well, what I have in mind is this, I come from New 

York, and they have now these big outlet stores. In many instances, the prices actually go down, because you’re talking about 

bulk buying, in terms of purchasing. But at the same time, it does 

not help seniors, in many instances, that can’t get to these outlets. 

So, therefore, they will not go out and make these purchases and 

will not be able to substitute. 

Ms. ABRAHAM. Let me try to respond on that point, specifically. 

We do have discount outlets represented in the CPI, with some lag, 

in proportion to the share of expenditures that occurs at such outlets. An issue that has been raised is the fact that we don’t attempt 

to compare the prices in older, traditional stores directly to the 

prices in the outlet stores. It has been suggested that we should. 

There are a variety of reasons why that might not be appropriate. You are suggesting a reason why, if we were to do that, 

which we don’t, we might get an answer that wouldn’t be accurate 

for senior citizens. 

Mr. TOWNS. Let me give him his time back. The point I’m really 

making is, isn’t it true that the poor pay more? 

Ms. ABRAHAM. I don’t know. 

Mr. SANDERS. Let me pick up, because that’s just what I was 

going to say. The truth is, it’s very expensive to be poor, very expensive. No question about it. 

No, I think you’re absolutely right. When you are rich, you have 

a good bank to bank in; when you are poor, you go cashing your 

84

check, what do you pay when you cash your check, in your neighborhoods there? 

Mr. TOWNS. There you go. 

Mr. SANDERS. They rip you off right and left, OK. 

Mr. TOWNS. Four dollars right away, right up front, $5. 

Mr. SANDERS. What happens if you don’t have an automobile and 

you can’t go? The same situation exists in my State. There are new 

outlet stores that I suspect are cheaper. But you know what? Poor 

people don’t have automobiles, and they can’t get to those places. 

They go shopping in local mom-and-pop stores where the prices are 

often a lot more expensive. 

We can go on and on. Again, I think your job is a very difficult 

job, weighing all of these factors. But I think the evidence is quite 

overwhelming that it is very expensive to be poor. When you 

bounce a check, if you don’t have money, then you’ve got to pay $15 

to the bank, or $20 to the bank. 

But, I mean, is there a prejudice that discriminates, in a sense, 

against the poor who don’t have the freedom of mobility to purchase certain types of products? 

Ms. ABRAHAM. We’re attempting to track not—maybe I can clarify this point. We’re not trying to track the level of the expenditures that people have to make. We’re tracking the change in those 

expenditures. So I can’t tell you whether things cost poor people 

more than rich people. 

Mr. SANDERS. But if there are changes because these large discount stores are selling products cheaper, and you’re going to track 

that. 

Ms. ABRAHAM. We don’t pick that up directly. If it’s true that an 

older store is selling something and a discount store comes in and 

sells it for less, the way the index is currently constructed that 

would not show up. 

Mr. SANDERS. OK. Thank you. Let me just conclude by saying, 

most importantly, you’ve got to maintain your intellectual independence from all political pressure, in my judgment, and I hope 

that you will do that. 

Mr. SNOWBARGER. Let me just followup on that comment. I want 

to reiterate what I said my initial remarks, and that was, I don’t 

think anybody is asking for this process to be politicized. What we 

are trying to do, since we incorporate your product in what we do, 

we need to have a sense that we are using an accurate projection, 

that we are using the proper test, when we adopt policy. 

I think that’s really the reason for the questions that I’ve had, 

at least, particularly about the delays and the R&D that’s involved 

in this. 

Go ahead. 

Ms. ABRAHAM. On that point, I certainly agree. Our objective is 

very much to produce the most accurate statistics possible. And I 

can assure you that, since I have been at the Bureau, I expect before that but certainly since I have been there and at the present 

time, we are working aggressively toward that end. 

I also would like to say that we can address some of these issues 

that have been raised and we are working toward addressing them. 

In the budget proposal that we currently have pending before the 

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Congress, we have laid out all of the steps that we think we know 

how to take, at this point, to produce the best measure possible. 

Having said that, I think it’s also important to be clear that 

there are some things that have been raised as issues that I just 

don’t think we know how to address at this point. So I don’t want 

to give the misleading sense that it is possible for us, or that anyone knows how, to produce a perfect, true, cost of living measure. 

I can elaborate if you would like. This point is discussed a bit in 

my formal statement. There are things that I think the state of 

knowledge in the economics and statistics professions is such that 

we just don’t know how to address. 

Mr. SNOWBARGER. OK. Let me go back to an earlier line of questioning. Mr. Shays picked up on it a little bit. I had indicated, in 

my initial questioning, I was concerned about—well, first, with the 

Stigler Committee report, that we had a 17-year lag before we at 

least had major changes in how we did things. Then I had mentioned a decade, and you weren’t sure where that came from. 

As it turns out, it came from an April 11, 1997, Wall Street Journal article where—well, the headline is, ‘‘Labor Bureau Unveils Experimental CPI.’’ I presume that’s this geometric mean that you 

were talking about. 

Ms. ABRAHAM. Right. 

Mr. SNOWBARGER. And one of the comments was, ‘‘BLS officials 

stressed yesterday that the change has been under consideration 

for more than a decade.’’ That’s the kind of statement that concerns 

me. I understand the lead time on a weapons development system. 

I’m not sure I understand that kind of lead time on a statistical 

measure. 

Ms. ABRAHAM. The person who presented that press briefing is 

here. 

Is that accurate? 

There was a misunderstanding. The quotation gives a misleading 

impression. 

Mr. SNOWBARGER. Well, I know the chart that they have in here 

shows from 1991 projected out to 1997. 

Ms. ABRAHAM. Right. We went back to 1991 and constructed the 

data. 

Mr. SNOWBARGER. You reconstructed the data. 

Ms. ABRAHAM. Yes. 

Mr. SNOWBARGER. OK. Well, that’s a different line of questioning 

altogether. But I am concerned that it takes us as long as it appears to, to get these changes in place. 

Ms. ABRAHAM. I’m concerned, too. As I have indicated, certainly 

in my time at the Bureau, we have been working very aggressively 

to make those improvements that we could identify as being possible to make in the CPI. 

I’ve only been at the BLS for getting on 4 years now. My Deputy 

Commissioner, Bill Barron, has been at the Bureau for more than 

25 years, and he tells me that the budget proposal that we currently have pending before the Congress is the first proposal in 

which we have had the opportunity to ask for resources to speed 

up our work. 

So I think there may be issues with respect to a sense of urgency 

at points in the distant historical past that people on the staff may 

86

or may not have had, and I just can’t speak to that. Certainly, at 

this point, we have a sense of urgency. But I think that there are 

also issues with respect to how interested the Congress, for example, might or might not have been in funding improvements that, 

in another context, could have been perceived as simply esoteric. 

Mr. SNOWBARGER. Understand. 

Mr. SHAYS. Would the gentleman yield? 

Mr. SNOWBARGER. Yes, I would yield. 

Mr. SHAYS. I just really want to be clear on the concept of ‘‘ask.’’

I don’t want to split hairs here, but I blame Congress when Congress is asked and doesn’t step forward, or I blame Congress when 

Congress should have the knowledge and should step forward. I 

blame any department that doesn’t ask for it. And so Congress 

can’t prevent you from asking for something. 

So I don’t understand the concept of ‘‘ask.’’ Are you saying the 

administration didn’t allow you to ask for it? 

Ms. ABRAHAM. Since I have been at the Bureau, I feel like we 

have been moving forward aggressively, and that’s the only period 

of time to which I can speak directly. 

Mr. SHAYS. OK. But you put on the record, and it is on the 

record, that this is the first time you’ve been able to ask for it. I 

do not understand that. I want you to explain that to me. 

Ms. ABRAHAM. This is information that was given to me by my 

Deputy. Could I ask him to come forward? 

Mr. SHAYS. Sure. We need to swear your Deputy in, though, 

when he comes. 

Would you swear in the Deputy? 

Ms. ABRAHAM. He really is in a better position to provide historical context than I am. 

Mr. SHAYS. No, I don’t mind. Let me just say something, if I 

could, Mr. Chairman. 

We’re trying to understand something. If there’s any other person—we’re not trying to put you on the line here, if others can 

share information. So if you have anyone else you would like to 

come up and have us swear in, I think we should do it, and then 

we could have more dialog. 

Ms. ABRAHAM. I think, in terms of the history of the BLS budget, 

Mr. Barron is the best person. 

Mr. SNOWBARGER. Sure. 

[Witness sworn.] 

Mr. SHAYS. I thank the gentleman. 

Mr. SNOWBARGER. I guess the question is before you now, of Mr. 

Shays. Please identify yourself for the record. 

Mr. BARRON. My name is William Barron. I’m the Deputy Commissioner of the Bureau of Labor Statistics. 

Mr. SHAYS. One of the things that I would like to just be clear 

on is that I do come with this bias. First, I don’t come with a bias 

that we should use the CPI to balance the budget. In fact, I recommended to my own leadership that we should not even include 

the CPI, and any dividend should be a dividend. In other words, 

if there’s a change in the CPI and there’s a savings to the taxpayers, that should just be a plus. So I just want to say that to 

you. 

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But what I do come with a bias on is that we should move more 

quickly. I’d like to know what kind of resources you have available 

and what kind of resources you think you need. And I can forget 

the other question about the ‘‘ask’’ issue, because I think I know 

the answer, and I think it won’t get us much. So tell me what kind 

of resources you have and what kind you need. 

Mr. BARRON. The ongoing budget for the Consumer Price Index 

is about $41 million a year. That’s an estimate for fiscal year 1997. 

That excludes the cost of the expenditure survey, the continuing 

consumer expenditure survey, which we put in place in the late 

1970’s. That was really the first time we had the opportunity to get 

the funding to do that. So it became operational in probably 1979, 

1980. That would be another $18 million or so. 

I’d like the opportunity to provide some of these numbers for the 

record, because I’m doing this from memory. 

Mr. SHAYS. Sure. 

Mr. BARRON. The research budget in the price program is, I 

would say, approximately a million, million and a half dollars. It’s 

very small. At any rate, I agree with you, Congressman, that the 

agencies have a responsibility to ask for things. 

So I would put it this way: I think our 1998 budget proposal enhancement level represents the most aggressive thinking that we 

have had the opportunity to make, and it represents the most aggressive set of proposals we know how to make, at this time, to 

speed up this process. 

Mr. SHAYS. The second part of the question is the one I care 

about, not that you’ve been able to ask. But are you asking, in your 

1998 budget, what you need to move as quickly as conceivable? 

Mr. BARRON. As we know how to do. ‘‘Conceivable’’ is a tough 

one, Congressman. 

Mr. SHAYS. As you know how to do. 

Mr. BARRON. Yes, sir. 

Mr. SHAYS. OK. 

Mr. BARRON. Could I add one more thing? In the past, you know, 

there are a lot of constraints. I don’t want you to feel that anybody 

from the BLS has blamed the Congress for things. There are a lot 

of budget constraints we operate under before we are able to 

present things to our appropriations staff, which has been very 

supportive when we’ve had the opportunity to present things. I’m 

going back in time, prior to the tenure of the current Commissioner. 

Mr. SHAYS. I’m not just focusing on this administration. We’re 

talking different administrations. 

Mr. BARRON. Right. 

Mr. SHAYS. But are you saying that—have you asked for more 

in your research side of the budget and been turned down by—who 

would you report to? I don’t know. 

Ms. ABRAHAM. The Secretary of Labor. 

Mr. BARRON. Secretary of Labor. 

Mr. SHAYS. And then he has to—or ‘‘she,’’ in many instances—

reports to OMB? 

Mr. BARRON. The Office of Management and Budget. Sometimes, 

over my career, we’ve had sort of a bifurcated process. 

88

Mr. SHAYS. What I want to know is, in the last 4 years, have you 

requested—is this the first time you have made a request to your 

Secretary to increase the research part of your budget? 

Mr. BARRON. I could answer that—let me answer that the way 

that gives you the answer that’s most appropriate for your question. You used 4 years, and that covers that time when I was Acting Commissioner. During that time, we did ask for money to revise the Consumer Price Index, and that money did not make it—

that request did not make it to the Congress. 

Mr. SHAYS. And I accept your point, Ms. Abraham, that Congress 

could have been focused on this 4 years ago, as well. So I accept 

that. 

Mr. SNOWBARGER. If I could, I’ve got three questions here, real 

quickly. 

The first one really kind of goes to this budget request and a 

question that I have about how we go about this process. Just for 

instance, on your web site, you list 12 other statistical Federal 

agencies that compile economic data. Are we, in the Federal Government, getting the most for our money out of those 12 different 

data collection agencies? Do you share information? Do you collect 

the same kinds of information? Can you share information? 

Ms. ABRAHAM. There currently are constraints on our ability to 

share information with the other statistical agencies. That’s something that I think it would be desirable to address. 

Mr. SNOWBARGER. What prohibits you from doing that? 

Ms. ABRAHAM. There are statutory barriers to sharing information. The Census Bureau, for example, is covered by a law that 

says that when they collect information, either from businesses or 

from individuals, that they can’t share those individual records 

with anyone else, and that includes the other statistical agencies. 

I think it would be desirable, for a variety of reasons, for us to be 

allowed to share that information, for carefully specified purposes, 

in a constrained kind of way. 

Having said that, it is not my sense that there is much duplication in the activities of the statistical agencies. The only real example I can think of is that, because of legislative constraints on sharing data, the Census Bureau maintains a list of establishments 

that they use for constructing samples for surveys, and we maintain a separate list. 

Beyond that, I know of no real examples of duplication of effort. 

I think that there would be things that we could do that would let 

us improve our statistics, if we were able to share information, and 

maybe around the margin, some efficiencies. 

Mr. SNOWBARGER. Well, going back to some of the questions that 

were asked earlier about specific segments of the population, 

whether its the poor, whether its the elderly, however we’re going 

to divide up the population, don’t you have access to census data 

that would at least give you some educated intuitive approach to 

defining those things, and about buying patterns, things of that nature? 

Ms. ABRAHAM. We have information from our consumer expenditure survey on what older individuals buy. 

Mr. SNOWBARGER. That would be more accurate? 

89

Ms. ABRAHAM. I think our consumer expenditure survey gives us 

the best, as far as I know, really the only, available information on 

that. The problem isn’t that the information is not accurate; the 

problem is that the sample is small, so there is noise in the data, 

which constrains our ability to construct measures that are precise. 

Mr. SNOWBARGER. Well, I would appreciate it if you could let the 

committee know what barriers there are in statute to sharing this 

information, so that we might take a look at doing that. 

Ms. ABRAHAM. I would be very happy to do that. I would say 

though, that I don’t think that the information sharing is really 

going to be directly helpful in addressing the issues we’ve been discussing today. 

Mr. SNOWBARGER. I yield to the chairman. 

Mr. SHAYS. Mr. Towns, I just have one more question. Do you 

have any questions? 

Mr. TOWNS. No. I just want to find out why. I don’t understand, 

if you can use census data, why it wouldn’t be helpful. I don’t quite 

understand that. Could you just sort of spend a moment educating 

me? 

Ms. ABRAHAM. Why the statistical agencies being able to share 

information wouldn’t be helpful? 

Mr. TOWNS. No, no, no. If you have the information that is collected, that it would not be helpful to you. The census information, 

we’re talking about. 

Ms. ABRAHAM. I had understood the subject we were discussing 

here to be, specifically, assessing the expenditure patterns of older 

individuals. Census really doesn’t collect much in the way of—I 

don’t know that it collects any information on those expenditure 

patterns, and certainly not at the level of detail that would be helpful to us in producing the Consumer Price Index. 

For producing the Consumer Price Index, we need to have very 

detailed information on expenditures in each of 200-plus categories 

of items in order to appropriately weigh the index. And Census just 

doesn’t collect anything like that. 

Mr. TOWNS. OK. 

Mr. SNOWBARGER. Mr. Shays. 

Mr. SHAYS. Just as Mr. Sanders was talking about, and we on 

the committee were talking about the differences in cost of living 

for, say, a senior versus a young family, there obviously are regional differences. I just need to have a sense. My brother-in-law 

has bought a home in Georgia, three and one-half baths, almost 

4,500 square feet, for $215,000. In my district, that would cost between $600,000 and $1 million. 

Are elderly—in concentrated areas, would I make assumptions 

that cost-of-living in Florida would be lower than cost-of-living in 

New York, or would it parallel? 

Ms. ABRAHAM. There are really two different things, I think, embedded in your question. One is, what’s the level of the cost of living? 

Mr. SHAYS. Right. 

Ms. ABRAHAM. That’s not what the CPI is trying to measure. We 

have been working, on an experimental basis, on trying to put together measures that are informative as to differences in cost levels across geographic areas, but that’s not the CPI. The CPI is just 

90

tracking how the prices that consumers pay for the things they 

purchase are changing. It may well be that there are differences in 

that across geographic areas, too. 

Mr. SHAYS. You are saying the base is lower to start with, but 

the cost of living may go up about proportional? 

Ms. ABRAHAM. Right. 

Mr. SHAYS. OK. 

Ms. ABRAHAM. But we do produce, as a by-product to what we 

collect or produce, the national index, regional indexes. So that’s 

something that one can take a look at. 

Mr. SHAYS. Let me just nail this down a little bit more. So even 

though I see wide disparities of prices, would it be your testimony 

that cost of living tends to go up pretty much—you don’t see the 

wide differences, in terms of cost increases? 

Ms. ABRAHAM. I would want to go and look at the data, specifically, but it is not my sense that we’ve seen dramatic differences 

across geographic areas in the rates of growth of consumer prices. 

I would like to provide the data for the record, if I could. 

Mr. SHAYS. Sure. Thank you. I appreciate the committee’s indulgence. 

Mr. SNOWBARGER. If I can finish up with one final question. As 

you’ve talked today, and we’ve been talking about process and the 

methodology that you use, you indicated that there is a certain 

methodology that you have instituted already that has made a 

downward adjustment of about two-tenths of a percent, I think is 

what I remember you saying. 

Ms. ABRAHAM. Right. On net, over the past couple years. 

Mr. SNOWBARGER. Right. And then the possible shift to a geometric mean might mean an upper limit of a quarter of a percent, 

but that would be a downward adjustment. 

Ms. ABRAHAM. It would slow the rate of growth of the index also. 

Mr. SNOWBARGER. OK. And I guess the overall question, then, 

based on two things, is that thus far, as you’ve tried to determine 

how methodology ought to be changed, all of those would seem, at 

this point in time, to indicate that the Consumer Price Index, as 

we have been calculating it in the past, has been overstated? 

Ms. ABRAHAM. Well, we’ve made a number of changes over the 

past few years. On net, those changes have led to a slowing in the 

rate of growth of the index. There was a piece of the way we were 

putting together the housing measure that we changed that worked 

in the opposite direction. 

Mr. SNOWBARGER. But the net. 

Ms. ABRAHAM. The net effect has been to slow the rate of growth 

of the index. 

Mr. SNOWBARGER. Again, getting back to the point that, at least 

from your research thus far, changes that you feel are legitimate 

and need to be made would indicate that we have been overstating, 

in the past, and we need to adjust it so that the—I forget what you 

said—that the rate of growth is not as fast? 

Ms. ABRAHAM. The changes we have made, and the one change 

that we are looking at making, that I can give you any quantified 

information about, have worked and will work, on net, to slow the 

rate of growth of the index. 

Mr. SNOWBARGER. Thank you. 

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Are there other questions at all? 

Mr. TOWNS. No. Thank you very much. 

Mr. SNOWBARGER. Thank you very much, Ms. Abraham. We appreciate your being here. 

Ms. ABRAHAM. Thank you. 

Mr. SNOWBARGER. We will make some adjustments real quickly 

here to get our second panel moving. 

[Witnesses sworn.] 

Mr. SNOWBARGER. Our second panel, I might just introduce you 

all real quickly before we get started. Our second panel consists of 

Mr. Charles Hulten, professor of economics, University of Maryland; Dr. Kurt Karl, senior vice president of U.S. Macro Group, 

WEFA, W–E–F–A, which I presume you will explain when we get 

there; Mr. Dean Baker, who is an economist at the Economic Policy 

Institute; and Mr. Matthew Shapiro, professor of economics, University of Michigan. 

Mr. Hulten, we will begin with you. 

Mr. SHAYS. Mr. Chairman, I wonder if I could interrupt and just 

make a suggestion, with your permission, to our panelists. 

You have been gracious enough to sit here and listen to the questions already asked, and you have been gracious enough to listen 

to the testimony, as well. If you are so inclined not to read your 

testimony but want to just jump into those issues and make comments—in other words, if you want to read your testimony, but if 

you also want to summarize and respond to some of the questions, 

I think the committee would appreciate it. We certainly appreciate 

the fact that you listened to the others. 

Mr. SNOWBARGER. I might also remind the witnesses that we 

have allowed for your full statements to be put into the record in 

their entirety. So keep that in mind. 

Mr. SHAYS. You’ve got lots of options. 

STATEMENTS OF CHARLES R. HULTEN, PROFESSOR OF ECONOMICS, UNIVERSITY OF MARYLAND; KURT E. KARL, EXECUTIVE VICE PRESIDENT, U.S. MACROECONOMIC SERVICES, 

WEFA; DEAN BAKER, ECONOMIST, ECONOMIC POLICY INSTITUTE; AND MATTHEW D. SHAPIRO, PROFESSOR OF ECONOMICS, UNIVERSITY OF MICHIGAN 

Mr. HULTEN. I would like to summarize my written statement, 

if I could, because there was so much ground covered earlier today 

that I’m not sure I would know where to start, on a piecemeal 

basis. 

I would like to address my remarks today primarily to the issue 

of quality change in the CPI. Of all the problems that beset the 

CPI, this is undoubtedly the hardest. The redoubtable Adam Smith 

looked at the issue and walked away from it, saying that it’s such 

a very disputable matter that he saw the whole issue as somewhat 

uncertain. 

This is echoed, I think, down over the years, and it has certainly 

been repeated by one of my fellow panelists who called a quality 

change the ‘‘house-to-house combat of price measurement.’’ But just 

because it’s hard doesn’t mean we can afford to ignore this issue. 

Mismeasurement of quality translates directly into mismeasurement of price. And according to the Boskin Commission, about half 

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of the 1.1 bias that they identified across the board in the CPI is 

due to the quality area. 

Unfortunately, there aren’t any quick fixes for these problems. To 

use a current phrase, no low-hanging fruit on the quality tree. But 

there are some things we can do now. The first thing is to make 

a commitment to invest in our statistical infrastructure. I have, in 

my written testimony, given some of my ideas, and I would like to 

give some of the reasons why I think these ideas might be worthy 

of consideration. 

Much of my thinking is based on some research done by BLS 

staffers, Brent Moulton and Karin Smedley, who studied the CPI 

process for the year 1995 and observed that, in the items that they 

studied, the total price change was 4.7 percent. But this really was 

not inflation. Instead, the BLS undertook a number of adjustments, 

technical things like the link, and class mean, overlap, and direct 

quality adjustment methods. When the smoke settled on this, the 

actual change in the CPI was only 2.2 percent. In other words, the 

BLS is already making adjustments to the CPI of more than half 

of the total observed price change, for things that might loosely be 

called quality. 

And I have, in my examination of the CPI problem, zeroed in on 

some of these methods and come to the conclusion that, at least in 

one case, that is to say the link method, that they may be overadjusting for quality, not underadjusting, as is commonly believed. 

On the other hand, there are other areas, another method, the direct quality adjustment method, was probably biased in the other 

direction. 

I think that sorting out the various biases and what they already 

do should be a major item on their research agenda. And these are 

not the only things to worry about. Quality and new goods come 

in during this process. We heard described earlier sample rotation. 

About one-fifth of the CPI sample is changed every year, and this 

is an opportunity for new goods to come in. 

Unfortunately, the uptake process is rather slow, because it’s essentially a reactive process rather than a proactive process. As a 

result, we see instances like cellular telephones, which were introduced in 1983 and are still not in the CPI. 

This lag is only part of the problem, however, because when 

items like cell phones do come in, they are brought in in a way that 

doesn’t change the overall level of the index. What happens instead 

is that only subsequent changes in this good are allowed to affect 

the CPI. But surely there is a gain to the consumer at the point 

of entry of the new good. The technical term for this is ‘‘consumer 

surplus,’’ and in the current BLS procedure is assumed as essentially zero. 

This leads, I think, to a variety of potential opportunities to improve the statistical infrastructure. I would say, as a first step, that 

I would like to see the study by Moulton and Smedley made a routine part of the BLS study program. 

I found it very useful, and I think it would be very useful to have 

this provided every year, and indeed extended in a number of ways 

that I have indicated in my testimony. I think, if we are going to 

embark on a procedure where we urge BLS to make changes, we 

need tools for diagnosing the effects of these changes. 

93

Another set of ideas about the BLS itself, and they are somewhat 

technical, but I will mention them anyway. First, I think they 

should eliminate the use of the link method. This will not be possible immediately, but it, I think, should be set up as an objective. 

And this is the predominant way that they actually handle quality. 

Second, I think they should accelerate the sample rotation period 

for goods in which the pace of innovation is obviously very rapid. 

I think they are planning to do that, in fact, but I think even more 

proactive methods might be adopted. I’m not sure what they are, 

but I think they should be at least considered. 

Finally, I think they should adopt superior valuation for the new 

goods. Instead of assuming that the consumer surplus is zero, I 

think some other assumption might be better. 

I think, taken together, this will move the CPI more toward a dynamic cost of living index. But I also want to emphasize that the 

issue is not really one of just ordering the BLS to get it right. I 

think part of the problem arises because they had been, historically, pursuing an objective of pricing a fixed bundle of goods, and 

now the objective has shifted, and this has introduced a whole host 

of new problems to be dealt with. 

I think that dealing with these problems is going to cost a lot of 

money. It’s my reading, anyway. But I do think the benefit cost 

ratio is quite high. The Boskin Commission has estimated that 

their 1.1 bias is adding about $1 trillion to the Federal deficit over 

12 years. If just a few percentage error points in this estimate will 

amount to billions of dollars. So I think spending a few million dollars to try to improve these estimates would have a very, very high 

benefit cost ratio. 

The final thing I would like to say relates to something that has 

been mentioned in the earlier proceedings, and that’s the question 

about an externally imposed fix and whether it will happen or 

won’t. 

I would just say that frustration or delays and technical difficulties, combined with the prospect of substantial budget savings, 

might make this look like a good idea, but I personally believe that 

it is emphatically the wrong approach. Because I think the uncertainty about the true bias is sufficiently large that any number 

that you are likely to select is probably going to be the wrong number, and it’s probably going to be wrong by quite a large amount. 

And I think it sets a terrible precedent for the American statistical system. I would just ask the question: Will frustration over 

the upcoming decennial census lead to more external fixes? I really 

think there is no substitute for accurate measurement, and I think 

you ought to be prepared to fund the investments necessary to 

build up our infrastructure. 

Thank you. 

[The prepared statement of Mr. Hulten follows:]

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Mr. SNOWBARGER. Dr. Karl. 

Mr. KARL. Thank you very much. 

You asked about ‘‘WEFA.’’ WEFA was originally, in 1963, founded by Dr. Lawrence Klein, Nobel laureate, as Wharton Econometric 

Forecasting Associates, hence the acronym. In 1987, the University 

of Pennsylvania was bought out entirely and retained its name, 

‘‘Wharton,’’ about the same time we were merged with Chase Econometrics, and Chase Bank kept their name, ‘‘Chase.’’ Hence, we 

came up with WEFA. 

I would like to just summarize my comments. I will preface that 

by saying that I am no expert on measuring Consumer Price Indexes; rather, as an economic consulting and forecasting firm, we’re 

experts on the U.S. economy and using the data, rather than measuring these things. 

The CPI is a price index which measures the cost of purchasing 

pretty much a fixed basket of goods, rather than a cost of living 

index, which is how it is often used. A cost of living index, of 

course, would attempt to measure what really happens to people, 

as opposed to what happens to the basket of goods. 

It is my opinion, since the CPI is often used as a cost of living 

index, by Congress in their legislation, for example, on Social Security payments, as well as in private contracts, particularly between 

labor and management on cost of living adjustments for wage negotiations, that Congress should direct the Bureau of Labor Statistics 

to actually create an index which is the cost of living index, and 

provide the necessary funds to create that index. 

I agree with the widely accepted view that the measurement of 

the CPI, with respect to a cost of living, is biased upwards. It overestimates the rate of change of the cost of living. It’s important to 

correct for that, not only because the cost of living index is used 

in business and government obligations, but also because it would 

provide a more accurate understanding of what’s going on in the 

U.S. economy. 

For example, the CPI is used in producing what we call the gross 

domestic product information, produced by the Department of Commerce. That is used to adjust the consumption expenditures by consumers and get what is called a ‘‘real’’ estimate of gross domestic 

product, after-inflation estimate of gross domestic product. 

Understanding how rapidly the economy is growing, understanding how rapid inflation is, it’s quite important for setting Government policy at the congressional level as well as at the administrative level, not to mention the Federal Reserve Board, with respect to how to adjust interest rates. 

In addition, businesses use the GDP numbers as well as the Consumer Price Index numbers to project their product sales. Most of 

our clients are large corporations or State and local governments, 

as well as the Federal Government. They use this information to 

project their sales of refrigerators, or the revenues, in the State of 

Utah, for example, of corporate tax revenues, or something like 

that. 

It’s nicer to have unbiased data when you are projecting sales of 

refrigerators, nicer to have unbiased data when you are projecting 

your sales or your revenue. 

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The estimate of bias by the advisory commission to study the 

Consumer Price Index, which I will refer to as the CPI Advisory 

Commission, of an upward bias of 1.1 percentage points per year, 

seems large to me. An upward bias of about 0.2 to 0.5 seems more 

plausible. 

I do not base this estimate on a rigorous analysis of the CPI. 

Again, I’m not a statistician. I have worked in statistical offices, 

have a great deal of sympathy for them, but I base this more on 

a subjective, intuitive understanding of what’s going on in the economy, rather than an assessment of the precise errors in quality adjustment, substitution, et cetera. 

With that, I would concur with the previous speaker, Professor 

Hulten, that we should proceed cautiously with how we adjust the 

CPI. 

I also strongly would like—I think it has been expressed widely 

this morning that we should keep the bias issue of the CPI separate from the budget process issue. These are two quite separate 

issues. One deals with measuring something that’s going on in the 

economy; the other deals with raising taxes and revenue, and 

spending money appropriately. 

Mr. SHAYS. Tell me who wants to raise taxes in this group. 

Mr. KARL. The fact of the matter is that we do raise taxes, and 

that’s all I meant by that, not up further. I use it in the sense of, 

they are raised. 

Mr. SHAYS. I’m teasing. 

Mr. SNOWBARGER. I wasn’t here when it was done. 

Mr. KARL. Just to reiterate, a more accurate measure of the cost 

of living is a worthwhile endeavor in itself, that we would like to 

know what the cost of living—how it is growing over time. That is 

something that the BLS provides information on, but actually 

doesn’t measure. The CPI was never intended to be a cost of living 

index. 

With that, I will yield. 

[The prepared statement of Mr. Karl follows:]

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Mr. SNOWBARGER. Thank you, Dr. Karl. 

Mr. Baker. 

Mr. BAKER. Thank you. 

I will take advantage of the invitation to address some of the earlier comments, but I do want to at least summarize some of the key 

points in my written statement. 

The invitation to testify here called on me to make assessments 

of how BLS could more quickly implement changes to improve the 

accuracy of the index. And I think that stems from a faulty assumption that the index currently is highly inaccurate. I would just 

present, quickly, three reasons why I would take issue with that. 

First, I would say that the vast majority of economists treat it as 

being accurate in their own research. Second, there is a whole 

range of implications, and what I mean here are logical implications, necessary implications, of a highly inaccurate CPI, which 

would lead to at least implausible, if not impossible, results in 

other areas of economics. And third, I would point out that, to my 

knowledge, there has not been a political figure in the country that 

has yet embraced the implications of a significantly overstated CPI. 

Let me just say a little bit more about each of those. The first 

point, the CPI or related indices gets into just about everything we 

do in economics. 

I have actually run through the journals—in fact, I had a research assistant of mine go through the written publications of the 

members of the Boskin Commission, and we found, in 37 articles 

where it would have been relevant, in only 6 of them did the members of the commission themselves even raise the possibility that 

the CPI significantly overstated inflation. In only one of those six, 

an article authored just last year, did they even bother to correct 

for it. 

So I think you would find, virtually across the board, that when 

economists do their research, they consider the CPI an accurate 

measure. I just would like to point out, economists like to say, 

we’re a discipline that looks at what people do, not what they say. 

And what economists do is, they use the CPI as though it’s an accurate measure. 

The second point I would make is, we’re saying two plus two 

equals five. If the CPI is wrong, that affects just about everything 

we do in economics. It affects our measures of rates of growth. It 

affects our measures of relative prices, relative demand. Just about 

everything we’ve done over the last 40 years would have to be reexamined. 

In my written testimony, I gave you one example. If you look at 

deregulation—I took some numbers from Robert Crandall at Brookings, probably the leading authority on the impact of deregulation—I showed that, if you took his numbers as he has calculated 

them, assuming the CPI is correct, we find that deregulation of airfares led to a gain to consumers of around 35 percent. 

If we assume the Boskin Commission’s conclusion was correct 

and apply it backward, that gain falls to about 15 percent, which 

may be entirely offset by deteriorations in quality over this period, 

meaning that the gains from deregulation might well have been 

zero or even negative. 

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That could be replicated with other areas of regulation, just 

about every other area of economics. My point here is, it leads to 

lots of things that many of us would find at least implausible, if 

not impossible, a very different view of the world. 

The last point, about how we view the political situation, public 

policy, if it’s the case the CPI is overstating inflation—let’s take the 

estimate of 1.1 percent—it logically implies real wages, real incomes are growing 1.1 percent more rapidly than we had thought. 

Going backward—I’ve done this in some of my work—you carry it 

backward, we would find out that most people who are now on Social Security, in their 70’s, by that implication, were living in poverty as recently as 1960. 

Let’s carry it forward. It turns out that, you know, our children 

and our grandchildren, who, of course, we are all worried about, 

they are going to be very, very wealthy. We probably don’t have to 

worry about them very much, because their incomes are growing 

1.1 percent a year, more rapidly than we had thought. Come 2020, 

2030, the dates we often look at, they are going to be quite rich. 

So these are implications that I have yet to see embraced by political figures, including many of the people who claim the CPI is 

substantially overstated. 

Now, let me just very quickly address some of the things that 

have been raised before. The concept of an elderly index, I know 

Representative Sanders raised it; other people have talked about it. 

I think there is a big issue here. Even the commission acknowledged that we need more research in this area. I think Congress 

would do well to consider appropriating the money that would be 

needed to start a full elderly index so we could have an answer to 

this question, at least if there is an interest in knowing how rapidly do costs rise for the elderly. 

The second point I would like to make, a lot of the examples 

where BLS, we could recognize, made a mistake, the cellular phone 

example that we all know well, these are often goods that are used, 

at least initially, disproportionately by high-income individuals. 

The implication of that is that we might have overstated their rate 

of inflation; we did not overstate the rate of inflation of the vast 

majority of the population that still does not have cellular phones. 

This raises a question about how you construct the CPI. Right 

now, it’s an expenditure-weighted index. If I spend $1 million a 

year, then my expenditures count 100 times as much as the elderly 

person who spends $10,000 a year. We could, instead, have it constructed as a person-weighted index. I would suggest that that’s 

something we may want to consider. 

Just to make a couple more points quickly, I often talk about the 

rate of inflation. I’m very hesitant to talk about the cost of living, 

for the simple reason that, if we really want to evaluate the cost 

of living, we have to count all the factors that affect the cost of living, such as things like crime, pollution. I’m drinking water here. 

It’s probably not tap water, if this is DC. These are things that are 

very hard to take account of. 

Economists have very little ability, I think, to really take account 

of that, and I would urge we be a little more humble. That’s why 

I think it’s more appropriate for us to say, we’re looking at a price 

index. We could look at producing a better price index. I don’t think 

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we really have the ability to produce a true cost-of-living index. I 

think it’s really just too complicated, on its face. 

I will stop there. 

[The prepared statement of Mr. Baker follows:]

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Mr. SNOWBARGER. Mr. Shapiro. 

Mr. SHAPIRO. Thank you for the invitation to testify this morning. 

The role of the CPI for indexing taxes and expenditures, as an 

indicator for monetary policy, and for a source of other economic 

statistics, gives rise to the great public concern about its accuracy. 

In this context, it is worth noting that the CPI is one of the bestexecuted statistical programs in the United States. 

BLS personnel have been at the forefront of the effort to identify 

and quantify problems that make the CPI a less than ideal measure of the cost of living. Moreover, their research has led to a number of improvements over the years. I hope that this testimony will 

assist you in your oversight of the BLS, as it continues its efforts 

to improve the CPI. 

Let me begin by recommending two specific steps, relating to 

issues that have already been discussed this morning, that the BLS 

should take in the near term to improve the accuracy of the CPI 

as a measure of the cost of living. 

First, the CPI neglects that consumers economize by changing 

their buying patterns when prices change. The BLS should eliminate the so-called ‘‘high-level substitution bias’’ by changing the 

formula used to aggregate prices across goods and services. 

Second, the BLS uses a procedure in building up its elementary 

price indexes that causes the index to have an upward bias. A 

change in the way the BLS averages prices, moving to geometric 

means, would greatly reduce or eliminate this bias. 

By taking these two steps, the BLS could reduce the CPI’s overstatement of the change in the cost of living by about one-half percentage point per year, on average. These two steps are the lowhanging fruit of CPI biases. 

The economics and statistical principles underlying them are 

well understood, and the data required to implement them are already available. Hence, significant progress can be made in the 

near term to improve the accuracy of the CPI, without substantial 

delay, and without substantial incremental resources. 

The timetable that Commissioner Abraham outlined for incorporating geometric means into the official index represents a reasonably rapid translation of research into practice. The BLS should 

act with similar dispatch in addressing the high-level substitution 

bias. 

Let me explain how they might do that in a feasible way. The 

formula that the BLS currently uses assumes consumers do not adjust their purchases of goods and services when prices change. To 

account for the fact that consumers do, indeed, economize, the BLS 

should use a so-called ‘‘superlative index’’ formula. 

A superlative index combines data on expenditure with data on 

price change to produce an index that is free of this high-level bias. 

The data on expenditures required to construct a superlative index 

are available with a lag of about a year, and this creates a practical 

difficulty in producing an index. 

Research that I have undertaken with David Wilcox shows how 

to produce a very good approximation to this superlative index, 

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nique can eliminate the high-level substitution bias, without compromising the timeliness or accuracy of the Consumer Price Index. 

If a superlative index is, indeed, the best way to construct a price 

index, you might well wonder why the BLS already does not use 

it. Decades ago, when the CPI program began, the desirable properties of superlative indexes were not fully understood. Moreover, 

the necessary expenditure data, which are now collected quarterly, 

were only collected, roughly, every 10 years. Given this progress, 

both in methodology and data collection, the BLS is now in a position to move forward rapidly. 

The issues I have been discussing concern how the BLS should 

aggregate prices across goods and services. The other problem, 

which we have already discussed today, is how it should average 

prices at the lower level, how it should average lettuce of different 

types. And I would endorse the BLS’s plans to move ahead rapidly 

to use the geometric formula. This change should take about a 

quarter percentage point off annual growth of the index, when it 

is introduced. 

These technical changes addressing the high-level bias, which 

the BLS is not yet planning to do, and the low-level bias, which 

they have in the works, are things the BLS can do in the short run 

that would have a measurable effect on inflation within the next 

couple years. 

The longer term challenge is much more difficult. Measuring 

prices in a dynamic economy is inherently problematic. New goods 

replace old ones. Changes in outlets occur, where consumers buy 

their goods and services. The quality of goods changes continually. 

All of these changes make it difficult to compare the price of goods 

and services across time. No simple change in the formula will 

make these comparisons any easier. 

To address the issue of new and improving goods and services, 

there is no substitute for investigating them item by item. The BLS 

should plan to review groups of items in the CPI on a rotating 

basis, to study how best to take into account the quality change. 

A one-time review could address the current backlog of problems, 

but it would not anticipate future changes in the marketplace. So 

this review, therefore, needs to be an ongoing part of the CPI program. 

Thank you. 

[The prepared statement of Mr. Shapiro follows:]

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Mr. SNOWBARGER. All of you have mentioned something that I 

guess is becoming more and more of great concern to me, and that 

is this distinction between a cost of living index, if we want to call 

it that, and the Consumer Price Index. 

I think all of you were saying that those are two different things, 

or should be two different things, measured in different ways, or 

at least there would need to be adjustments to a CPI to get to a 

cost of living index. And yet, we have based a number of Government programs, not only on the spending side, but also on the revenue side, that have basically assumed that they are the same, or 

that they are accurate. 

I would appreciate your comments. Have we adopted public policy that’s based on this inaccurate assumption, and how significant 

is that? Should we be looking to—well, I guess one of you suggested—was it Dr. Karl that suggested that we now call for a cost 

of living index, as opposed to a CPI? 

Mr. Hulten. 

Mr. HULTEN. Well, I suspect that, when the CPI program was 

first initiated, the fixed market basket approach was probably regarded as giving a reasonably accurate approximation to the true 

cost of living. I also suspect that people were not as concerned 

about the rapid pace of technical change then, and certainly didn’t 

face the kind of very short product cycles that we see today. 

So I think that the paradigm, if you will, that was appropriate 

in the past may be shifting quite a lot in the last two or three decades. But, at the same time, this has rendered the old concept of 

the fixed market basket obsolete, and we need to make the appropriate modifications to the CPI paradigm that are implied by that. 

So I would say that it’s not so much an issue of, we have a cost 

of living index on the one side and the CPI on the other, but a 

question of bringing the CPI into line with what we now think is 

the best practice for a cost of living index. 

Mr. SNOWBARGER. As opposed to two separate concepts, like Dr. 

Karl seems to indicate. 

Mr. KARL. All I was indicating was that you might be perfectly 

happy to continue producing a CPI which is on a fixed-weight market basket, and create another index on a cost of living basis that 

attempts directly, which the BLS acknowledges that the CPI does 

not, to estimate the cost of living. 

Let me go into a couple of things that I didn’t particularly cover 

earlier, in the summary. For example, if you want to get a more 

accurate estimate of the cost of living, there are some biases. We 

widely recognize those, quality, substitution, we’ve heard about 

those today. 

But for getting quality adjustments, that’s very, very complex, 

quite difficult. So you need to adopt some method that is systematic, in that regard, of adjusting for quality changes. The BLS already adjusts for quality changes. The criticism from the CPI advisory commission was that they don’t go far enough, and this is 

often the criticism. 

A second kind of thing is, we talked about substitution bias. People change their buying habits, depending on movements in prices. 

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ers. The consumer expenditure survey is the method for getting 

this basket of goods. 

Mr. SNOWBARGER. How often is that done now? 

Mr. KARL. Excellent question. I am not quite sure. It’s every 5 

years, I think. 

Mr. SHAPIRO. No, it is now done every quarter. And I think the 

point is that, when the BLS started doing the Consumer Price 

Index, in the early 1940’s, that survey was done every decade. 

There has also been a lot of conceptual progress in the economics 

profession. I know that you are frustrated that we are slow, but it 

wasn’t until the mid-1970’s that economists figured out how to do 

a price index that would take into account how consumers substitute. 

So we now know how to do the formula correctly. 

Mr. SNOWBARGER. You’ve compounded my problem with all this 

process by saying that you finally figured it out in the mid-1970’s. 

We’re in the mid-1990’s now, that’s 20 years, and we haven’t implemented what you apparently found out back then. 

I don’t understand what takes so long, once we’ve figured out 

that we’ve done it in a way that gives us maybe a skewed view of 

things. We now know how to correct for that, and have apparently 

figured it out, 20 years ago, and we’re still in a process where we 

think we may implement it down the road. 

Mr. SHAPIRO. I’m sympathetic with the Commissioner. It takes 

time to go from a highly technical paper in the Journal of Econometrics into actual practice. Also, the other ingredient was collecting the necessary data, moving the consumer expenditure survey from a decade to an ongoing quarterly sample, and that happened only in the late 1970’s. 

So this is something I think they should move forward quickly 

and can do it within the next few years. 

Mr. SNOWBARGER. Dr. Karl, we kind of interrupted. 

Mr. KARL. That’s OK. In any case, what you want to do, I mean, 

if you just review what Ms. Abraham mentioned, she said they are 

changing the basket of goods. From 1982 to 1984 was the old basket; now we’ve got 1993 to 1995. But we could more frequently update that basket of goods to adjust for the substitution problem. 

Finally, another way to improve the index would be to, every 5 

years—they have a 5-year rolling over survey of outlets that they 

use in the BLS construction of the CPI. Well, move it up to 3 years, 

or something, you see. These things can be adjusted for. 

I think it’s true—I can’t recall who said it, or maybe it has been 

said by a number of people—you will never get to the true cost of 

living for the average American. You will get a pretty good approximation, and that’s what the BLS should be directed to do, and 

funded and supported in that effort. 

Mr. HULTEN. If I can amplify my comments on the distinction between a pure price index and a cost of living index. 

Mr. SNOWBARGER. Sure. 

Mr. HULTEN. What we’re really talking about here, at least to my 

mind, are two different types of price indices: one that incorporates 

item substitution, and one that does not. What I was saying is, if 

we really want to look at a true cost of living, the implicit assumption here is that the physical and social infrastructure is constant. 

146

I think we clearly know that it’s not. For example, increasing crime 

that affects people’s behavior, that might require additional expenditures, burglar alarms, whatever it might be, that’s a cost of 

living increase for many people. Deterioration in school quality 

leads many people to send their kids to private schools, and that’s 

an increase in the cost of living for many people. 

Increased congestion which increases travel time to and from 

work is another example of a real increase in the cost of living for 

people, which is a reason why I am inclined to say we don’t want 

the CPI to be a cost of living index. I should also point out that 

in the Boskin Commission report, buried somewhere deep in its 

pages, you find a section which discusses some of these issues, and 

they say, but are these the sort of things that belong in a ‘‘price,’’ their emphasis, index. And I would say they don’t, because we can’t 

measure them very well. 

Mr. SNOWBARGER. Let me ask all of you, or anybody that wants 

to answer, I have a particular product in mind, and I don’t know 

how the change in that product figures in, whether it’s a quality 

change or what. And it’s similar to the cell phone. 

I’m thinking of my own experience that, somewhere back in the 

mid-1980’s, I decided to go out and buy a computer. And the computer I get at that point in time was, what was it, an 8086, at the 

low end, and probably cost $3,000, if you just purchased it directly. 

And there weren’t that many places selling an 8086, so you got an 

IBM or, you know, a Mac, or something of that nature. So there 

aren’t a whole lot of outlets. 

Now, fast forward to today, and I want to enter in and buy an 

entry-level computer for my family, that now costs me maybe onethird of what it cost 10 years ago. And not only that, I’ve got a faster processor, I’ve got larger memory, I have access to the Internet, 

I have software that’s loaded on it as it comes from the store. Is 

that a quality change? Where does it fit into these categories that 

we’ve talked about, I guess is my question. 

Anybody. 

Mr. HULTEN. Yes, it’s definitely a quality change. 

Mr. SNOWBARGER. OK. 

Mr. HULTEN. A dollar you spend on a computer now buys you a 

lot more computing power. It does, for example, buy you access to 

the Internet. The more powerful processors also allow types of software that were just not possible 15 years ago. The appropriate way 

of accounting for this quality change is very much at the center of 

the debate about the cost of living. 

Mr. SNOWBARGER. OK. So this market basket that we’re talking 

about, that we use right now, was when? 

Mr. KARL. The current one is 1982 to 1984. 

Mr. SNOWBARGER. The current one is 1982 to 1984. 

Mr. KARL. It’s being changed to January 1993 to 1995. 

Mr. SNOWBARGER. Which pre-exists even the first computer that 

I purchased. So how in the world do we consider that. 

Mr. BAKER. If I can clarify an issue here. I think there’s some 

confusion. They set weights for broad categories as of 1982 to 1984. 

They rotate items into the survey currently every 5 years. As I believe Katharine Abraham said, they are going to change that to 

every year, with rapidly changing items like computers. So the 

147

odds are they might be looking a little bit out of date in the computers; they are not looking at 1982–1984 models. 

Mr. KARL. Yes, that’s correct. I don’t mean to say that they are 

using the actual weights of what people spent in 1982 to 1984, but 

it does create a bias toward the 1982–1984. 

Mr. SNOWBARGER. Again, the question would be, if we’re circulating all those things through, what happened to the cell phone, 

which is the example that has been mentioned here, and many 

other kinds of things, whether it’s, you know, electronics—primarily electronics, I mean, that’s what comes to my mind anyway. 

Mr. HULTEN. Could I also make a comment? The actual CPI market basket is considerably more dynamic than the fixed market 

basket intention really suggests, because about 4 percent of the 

items in the CPI market basket are discontinued every month, and 

have to be substituted for by a fairly elaborate and involved process. 

Over the course of a year, there is a tremendous churning within 

the sample, and on top of this, you get this sample rotation process. 

So, actually, the notion of a fixed market basket really is a conceptual notion that really we don’t see in practice. 

The real question is, in the process of rotation and replacement 

of discontinued items, are we pulling in the new goods, like cell 

phones and VCRs and personal computers, at a rate that is appropriate. I think the general answer is that we have not been in the 

past. 

Mr. SNOWBARGER. I’m looking to my right, and I don’t see any 

Democrats to call on, so Mr. Shays, I will turn to you. 

Mr. SHAYS. I thank you. 

First, Mr. Baker, I found your testimony very compelling, but 

then I wanted to qualify it, because it seemed to sound like an allor-nothing. If we find that the CPI is totally out of sync, the implications are, as I went through your three points, we would have 

to rework the last 40 years. 

What happens if it was all right for the first 30, but simply isn’t 

all right for this last 10? So I’m just wondering if you didn’t really 

kind of overstate it a little bit. My sense is that this is a problem 

that has been presented more in recent history than in the last 40 

years. 

Mr. BAKER. Well, I think not, actually. I’ve looked very carefully 

at the history of the CPI, and I think what you find is a movement 

toward improving the methodology. And there is research that 

dates back—certainly the Stigler Commission compiled much of 

it—but there is research that has been ongoing since then which 

has indicated, if anything, the extent of biases, particularly in the 

area of quality, has diminished through time. 

The leading authority here, I would say, is Robert Gordon, who 

was a member of the Boskin Commission, and in his own work he 

showed a very, very substantial decline in the amount of quality 

bias in the CPI over the period which he looked at, which was from 

the early 1950’s to 1983. 

Mr. SHAYS. But your first point was, basically, that economists 

use the CPI as an accurate measure. And the implication there is 

that it has the support of most economists, or they wouldn’t use it. 

Mr. BAKER. That’s correct. 

148

Mr. SHAYS. I, basically, accept that argument. I also found your 

second argument, that we have to re-examine everything we do, 

and that it couldn’t be out of line as much as some say, because 

the implications would draw us to some absurd conclusions, provided you made the assumption that it was a problem that existed 

for 40 years. 

That’s the only area where I would want to differ with your testimony, which I thought was very interesting. I thought all of your 

testimony is interesting. 

Mr. BAKER. Let me just point out, you are correct in saying that, 

but I’m making the conclusion that this existed for 40 years, if it 

exists today, based on research that indicates that, if anything, the 

bias would have been larger. 

Mr. SHAYS. Let me ask all the other three of you. Do you think, 

because we say we have the problem now, that it did exist 40 years 

ago and was a significant factor? 

I would ask you, Mr. Hulten. 

Mr. HULTEN. Well, in the quality area, my sense is that there 

has been an acceleration in the underlying rate of quality change, 

but it’s certainly true that, if you go back to the 1930’s and 1940’s, 

a lot of new goods were introduced then, as well. 

Mr. SHAYS. But the fact is that we know, don’t we, we can’t keep 

up with the change. The change is astounding. It would seem to 

me that change is happening so much more quickly that that would 

be a factor. 

Mr. BAKER. If I could give some examples. 

Mr. SHAYS. I just want to finish. 

Mr. BAKER. I’m sorry. 

Mr. HULTEN. That’s one-half the problem. The other half is: what 

has BLS done about this, and how has that changed over time? My 

sense is that, based on earlier studies that I mentioned by Moulton 

and Smedley, quality adjustment within the CPI has also increased. 

Mr. Moulton is sitting over there. He is certainly more an expert 

on that than I am. But my sense is that that’s the other part of 

the issue. And it’s not just a question of how much quality change 

we observe in the marketplace, it’s how much of that change do 

BLS procedures miss. 

There are two targets which are moving: the quality change in 

the marketplace and what BLS is doing to measure the change. 

That adds another layer of complication and it’s very hard, at least 

for me, to come up with a summary judgment on that. 

Mr. KARL. If I could, one thing to clarify this, one thing I recommend is that we have two indexes. One would be the cost of living index which best approximates the cost of living, given the research at the time, and comes out on a very timely basis, and is 

not revised. Why not revised? Because contracts are written on 

this, and it becomes quite complicated if you revise data and then, 

oh, well, it’s now 1 percent less, and give me my wages back, or 

vice-versa; and another index, which takes into account the latest 

research and is revised over history. 

So if you look at the Consumer Price Index, it is an unrevised 

history of what has happened to prices. Yet the BLS, every year 

practically, consistently revises it, incorporates new methods of 

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quality adjustments, moves forward on more adjustments of introducing the goods that disappear and the new goods that come in. 

So it is not an animal that has a consistent bias over time, because it is not an animal that has been the same over time. And 

it’s nice, for research, to have an animal that is the same over 

time, because then you can, if you are using it to explain something 

or trying to explain it with data that is consistent over time, then 

you can get an accurate measurement of those relationships. 

So it’s a dynamic thing. 

Mr. SHAYS. So your bottom line conclusion is? Part of what you 

said went over me a little bit here. 

Mr. KARL. OK. That’s fine. 

Mr. SHAYS. No, not your fault. I’m willing to blame you for a lot 

of things, but not that I can’t understand something. 

I want to touch on the third part of Mr. Baker’s testimony, the 

third point, and that was, basically, that we couldn’t have been off 

all that much, because if we were off as much as, say, a point, and 

we go back 40 years and then go forward with this new data, we 

would come to absurd conclusions that simply wouldn’t make 

sense. 

That seems like a powerful argument on the surface, and I’m just 

really trying to get a better handle whether you think that some 

of the problem we see now is something that is more recent, in 

terms of its challenge to us. 

Do you understand my question? 

Mr. KARL. I tend to agree with Mr. Baker that 1.1 percent seems 

to be large. As a consequence, you don’t get these kinds of 

counterfactual information of, geez, we’re doing so well. One thing 

I use in my talks is that, well, if this is true, then the standard 

of living is rising so rapidly, everybody is happy; right? 

Often, in talking to audiences, you don’t find that they are feeling that their real standard of living is going up so rapidly. But the 

changes, the bias movement over time depends on how it was done, 

at what point in time. For example, Ms. Abraham mentioned in her 

testimony this thing dealing with the housing index, and that was 

considered highly overestimating the cost of living for the average 

person for a period of time, and they changed that, the way they 

measure housing costs over to this rental kind of thing. 

So the bias has always been there, and it has gone up and down, 

depending on how they have actually calculated the index. How 

high it is, I’m not an expert to say. 

Mr. SNOWBARGER. Mr. Shapiro, I want you to comment, as well, 

if you know what my question is. 

I just want to say to you, Mr. Karl, that I came from a middle 

class family, in a town that had upper middle income and more 

wealthy. You know, it was a big deal for my parents to take us out 

on a five-horsepower boat. We would rent this little boat, and we 

would go to a little island. It was five horsepower, I mean, this was 

a big thrill. 

And I think of people today and the boats they have, middle and 

lower middle income, that things that they have that I wouldn’t 

even have conceived of being able to enjoy, that they have for their 

kids, and so on. I just have to believe that it is a whole different 

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world out here, and I’m just not sure that we have captured it 

right. 

Mr. Shapiro. 

Mr. SHAPIRO. We know less about the bias as we go further back 

in time, but I think it’s fair to say it has probably been there for 

the last 40 years. I would be willing to extrapolate back the 1 percent number for 40 years. 

I think it’s probably wrong to think that the pace of quality improvements sped up dramatically. There has always been a lot of 

quality improvement, especially as bears on consumer goods. We 

think back to the advent of kitchen appliances, Teflon, nylon, penicillin, all these innovations happened much earlier. 

We tend to focus now on the electronics, because we are quite familiar with them and they are changing a lot now, but they are not 

a huge part of the consumer’s budget. There has been a tremendous increase in the quality of items that individuals consume over 

the last 40 years. 

I would disagree with Dean Baker’s conclusion that, if there has 

been this bias, much of economics has to be overturned. It’s true 

that, perhaps, we are 30 or 40 percent better off in real terms than 

we would measure using the CPI, but that is not an absurd conclusion. 

The remarks you just made about comparing the standard of living of individuals when you grew up versus now is in line with 

there having been a big bias. Things are definitely much better. 

There is a huge range of goods available that weren’t available, 

color TV instead of black and white TV, for example. 

Part of why people feel that economic times are bad or not as 

good as they have been is that the rate of growth in wages has 

slowed down substantially. In the 1950’s and 1960’s, it was 2.5 percent, 3 percent; now it’s zero or 1 percent, in a good year. The CPI 

bias wouldn’t make that go away. It would basically say it was 

growing even faster before and maybe growing a little faster now, 

but the slowdown would still be there. 

Mr. SHAYS. So the proportions would still be. 

Mr. Baker, you had wanted to make a comment. 

Mr. BAKER. I just wanted to point out that, you know, the issue 

isn’t just the number of new goods but their importance. Just to 

give you some examples of goods that got incorporated late into the 

CPI: air conditioners, home air conditioning was not in the CPI 

until 1964, when it was a fairly common item; air travel was not 

in the CPI until 1964; home clothes dryers were not in the CPI 

until 1964. You were mentioning boats. I would be willing to bet 

it was at least 1964, and maybe not until 1978, that that got incorporated. 

So this idea that we’re behind the curve in technology, because 

there has been such a substantial improvement in BLS procedures, 

even if there has been a more rapid rate of technological change, 

I’m willing to bet that we are much closer to the curve now than 

we were 30 years ago. 

Mr. SHAYS. Yes, Mr. Hulten. 

Do you want to go, and then I will come back? 

Mr. SNOWBARGER. No, if you are following it through, go ahead. 

Mr. SHAYS. No, no, why don’t you go, and then I’ll come back. 

151

Mr. SNOWBARGER. Just a couple questions real quickly. When we 

talk about cost of living, another problem area that we haven’t 

talked about is other factors that change our buying behavior. I 

don’t know if that’s going to be reflected in this CES, consumer expenditure survey. 

The example that was given by one of our colleagues early on 

was the price of steak going through the roof, and therefore you 

change to chicken, but your quality of life has gone down. When 

he mentioned that example, I immediately thought, coming from a 

beef-producing State, of the ripple effects that it had when dieticians were coming out and saying that beef is basically bad for you, 

red meat is basically bad for you. 

So now we, I presume, have changes in buying patterns that 

aren’t based on economics at all; they are based on something else. 

That person’s love of beef and having to change over to chicken will 

change his quality of life, as well, but apparently he made that decision to do so, and again, made it on a noneconomic basis. 

Is there any way to factor out those kinds of factors, when you 

are trying to figure out an economic index? 

Everybody wants to answer this at once, I can tell. 

Mr. SHAPIRO. I’ll take it. That’s quite difficult. We should not be 

too ambitious with what we ask the BLS to do. I think we should 

really concentrate on getting the best measure of the prices of 

transactions and the cost of living for basically market-oriented 

purchases. 

To broaden your question somewhat, I would be quite resistant 

to trying to have the environment or crime reflected in the Consumer Price Index, or a cost of living index that the BLS produces. 

Similarly, if health concerns cause substitution, that’s something 

that probably should be abstracted from, and we should just concentrate on prices and quantities, which we can measure. 

Mr. BAKER. Let me see if I can add a word on this. The point 

you are raising is exactly why it has taken BLS 20 years from 

when the research that Matthew Shapiro was talking about was 

done to try to implement that in the index, because there are real 

debates about how to appropriately implement it, and those continue today. So it’s not an open and shut question. 

Mr. SHAYS. Well, it’s taken us 20 years to balance the budget, or 

24. 

Mr. SNOWBARGER. It’s essentially 28, and we haven’t balanced it 

yet. 

Mr. SHAYS. We’re throwing stones. 

Mr. HULTEN. If I might also add something here. You have raised 

what is really, in many regards, the Achilles heel of index number 

theory, and that is the problem of changing tastes. This is known 

in the literature on index number theory, known as the ‘‘index 

number problem.’’ It’s also known that it is a very, very difficult 

problem, over and above the question of constructing an index for 

a fixed set of preferences. In some cases, there is no one correct solution. 

Mr. SNOWBARGER. It would seem, though, we’ve got four of you 

here, that you would all agree that the kind of example that I gave, 

the decision based on something other than economics, should not 

152

be calculated in this. We came to that conclusion in about 30 seconds. Why is taking 20 years? 

I still don’t understand. I understand debates go on and on, but 

I still don’t understand the length of time that it’s taking on some 

of these things. That really doesn’t need a response. I doubt that 

you will be able to satisfy my curiosity about why it takes so long. 

Mr. Baker, I want to go back to a statement that you made, and 

Mr. Shays, I guess, interpreted it a little bit differently than I did. 

Therefore, I want to give you an opportunity to explain what you 

meant by it. 

I almost got the feeling, when you were talking about the current 

CPI, that you were basically saying everybody uses it, therefore it’s 

accurate. And that doesn’t make sense to me. It’s like, you know, 

if you say it often enough, it’s true. I don’t believe that either. 

Mr. BAKER. Well, what I am referring to here is, I consider it 

worthwhile to know what people who are familiar with it think 

about it. So what I’m saying is that there has been some effort to 

say, well, economists all agree. There’s even been some crude polling done, saying, you know, so many of so many economists say 

they think it’s overstated by an average of 1 percent, 1.1, whatever 

it might be. 

So I’m just saying, if we value what economists think about it, 

my way of finding out what they think about it is seeing what they 

do in their work. 

Mr. SNOWBARGER. How many of them, though, go out and re-examine the CPI before they base their research on the CPI, or base 

their conclusions on it? In other words, how many of you go back 

and say, ‘‘Well, first of all, before I include that in my conclusions, 

I’m going to go back and do my own research on CPI. And once I’m 

convinced it’s accurate, then I’ll move on.’’ Isn’t it the case that you say, ‘‘I’ve got to start somewhere. I’m 

going to start with that and move on.’’ And that doesn’t necessarily 

mean that was an accurate measure. 

Mr. BAKER. It’s standard for economists, when they begin their 

research, to discuss the quality of their data. And if there is some 

reason to believe that their data has some flaw in it, to at least 

note it and, if possible, to make a correction for it. If, for example, 

I was doing work, and I was convinced that the CPI overstates inflation by 1.1 percent, I would just say, ‘‘We all recognize this. I’m, 

therefore, making this adjustment.’’ It’s a very simple thing to do. 

Mr. SNOWBARGER. Of course, that statement came out in December of last year? That was the timing of the Boskin Commission. 

Maybe it was out there before that. Is there more question now 

about the accuracy of the CPI than prior to the time that report 

came out? In other words, are more people looking into this now 

that might have just taken it for granted earlier? 

Mr. BAKER. I think there is more research being done in that 

area, but I think you could still look at the most recent journal articles, and you probably will not find a single article where the person has done their work assuming that the CPI was overstating inflation. 

Mr. SNOWBARGER. Well, yes, I would suggest the most recent 

journal work was done prior to December, most likely, at least the 

basic work. 

153

Mr. BAKER. That’s correct. I should also point out that the research on which they were basing this conclusion, for the most 

part, dates back, in many cases, 20 years. So this is not new research. This information, for the most part, was widely available 

to economists for a long time. They might have chosen to ignore it, 

but it was available. 

Mr. SNOWBARGER. Mr. Shapiro. 

Mr. SHAPIRO. It is important to ask what parts of economic research would be affected by this. In many uses of the CPI data, 

even if there were a bias, it would not change the conclusion. For 

example, if one were trying to estimate the impact of a change in 

Federal Reserve policy on the change in the rate of inflation, if 

there is a constant bias, that will just go in the constant term, and 

one can still estimate, consistently, what the effect of policy would 

be on changing the rate of inflation. 

Mr. SNOWBARGER. You are presuming the bias was consistent? 

Mr. SHAPIRO. I think that would be a reasonable assumption for 

that kind of study. 

Mr. KARL. Speaking, if I could, more from the business community, what we’re really looking for is accurate data. It’s recognized, 

and I think it’s widely accepted, that there are some problems with 

the Consumer Price Index. It’s widely used as a cost of living index. 

All I’m suggesting is that we get more accurate information on 

that, going forward as well as revised backward, clearly, if we have 

a revised historical series on the CPI. 

Mr. SNOWBARGER. I think we’re saying the same thing. 

Mr. SHAYS. I’d love to pursue that, if I could. 

Mr. SNOWBARGER. Sure. 

Mr. SHAYS. I wonder if you’re not saying you want it as much 

accurate, but you want consistent data. 

Mr. KARL. Consistent and accurate. 

Mr. SHAYS. Both, but almost if it’s consistently bad, at least it’s 

consistent. 

Mr. KARL. That’s exactly right. Just as Professor Shapiro mentioned, if the bias has been constant over time, it won’t matter for 

your estimation results. It’s just a constant. It’s just irrelevant to 

the study if it’s consistently wrong. The CPI, as it stands now, is 

not consistent over time. So something consistent is very useful in 

research, in addition to getting accuracy. They are different concepts. 

Mr. SNOWBARGER. Mr. Hulten. 

Mr. HULTEN. I wonder if I would also add that, while the spotlight today is on the CPI, there are many other areas of our statistical system where people suspect the data is flawed, perhaps not 

with a conviction that it’s biased in one way or the other. For example, our GDP measures exclude many important aspects of economic activity. 

A researcher who wants to try out a new theory by confronting 

it with data is likely just to swallow hard and use the data as they 

stand, realizing that almost all the data are problematic to some 

degree. 

Mr. SHAYS. Just one area that I’d like to just pursue because you 

both used the same imagery, low-hanging fruit. 

154

Mr. Hulten, I got the feeling that you were saying there isn’t any 

low-hanging fruit, in your testimony. I just want to be clear on 

that. You said, ‘‘There are no quick fixes for the quality problem, 

no low-hanging fruit on the quality tree.’’ So it just related to the 

quality issue? 

Mr. HULTEN. Yes, I was explicitly referring to the quality issue. 

I think it’s different in the area of substitution bias. 

Mr. SHAYS. OK. I would like that, for the record. 

Mr. Shapiro, you are basically saying, ‘‘By taking these two 

steps, the BLS could reduce the CPI’s overstatement of the change 

in the cost of living by about one-half percentage point per year, 

on average. These two steps are the low-hanging fruit of CPI bias.’’

And those were ‘‘high-level substitution’’ and ‘‘averages individual 

prices.’’ I don’t know what the second point is. 

Mr. SHAPIRO. The second point is the move to the geometric 

means. 

Mr. SHAYS. Can you move the mike a little closer to you. I’m 

sorry. 

Mr. SHAPIRO. The second point is the move to the geometric 

means, Commissioner Abraham indicated that the BLS is likely to 

make this change, beginning in 1999. 

Mr. SHAYS. That they are focused on, but not the first part. 

Mr. SHAPIRO. Not the first; right. 

Mr. SHAYS. And your point is, these areas there is more consensus on. It does happen to equal the amount that congressional 

leaders and the White House seem to have been reporting in the 

newspaper of about 0.45 percent. I suspect it’s in these two areas. 

The question I would then raise is, but how quick would this 

process take to deal with these two areas? 

Mr. SHAPIRO. I think the timetable that Commissioner Abraham 

discussed for the geometric means, or the second of my points, 

seem quite reasonable. 

Mr. SHAYS. Which is the beginning of 1998, so effect in 1999. 

Mr. SHAPIRO. Yes. It does take time to make sure everything is 

programmed correctly and to let the users know. That actually 

strikes me—they basically figured this out in the 1992–1993, to get 

it into the index in 5 years, given that it took some time to digest 

the original result and then figure out what the right solution is. 

Mr. SHAYS. How about the first point, on the substitution? 

Mr. SHAPIRO. I think they could do that about as quickly, but 

they haven’t started, so I think it would take another year or two, 

but not 17 years. 

Mr. SHAYS. So it would take another year beyond 1999? 

Mr. SHAPIRO. Yes. 

Mr. SHAYS. Almost the year 2000. What that says to me is that, 

if a budget agreement includes something higher than a 0.2 percent, or something beyond that, what I’m hearing you all say is 

that you support, as economists, the position of the Bureau of 

Labor Statistics on this issue. I’m making an assumption all of you 

do. 

Excuse me. I should ask you each, on the timetable. First, maybe 

I need to ask you if you view this as low-hanging fruit, Mr. Baker, 

those two points? 

155

Mr. BAKER. Yes, the low-hanging fruit. I can live with that. One 

qualification I would make, with the case of geometric means, is exactly what has been discussed here before, that it’s not appropriate 

everywhere. But I think BLS is going through it the right way, and 

introducing it in 1999 is a reasonable timetable. 

Mr. SHAYS. And substitution? 

Mr. BAKER. Substitution, I think there are some problems with 

adopting the method that Matthew Shapiro suggested. I think it’s 

a reasonable proposal, but I don’t know if I would jump to do it. 

And I would also point out that BLS, in their research on this, 

it actually turns out that the average amount that would affect the 

CPI is 0.14 percent over the last 8 years. In a typical year—this 

is driven a lot by the high inflation around 1990 and the Persian 

Gulf war—typical year, it would be just one-tenth of 1 percent. 

I just think it’s important to realize there is probably a little bit 

less at stake there than we might believe. 

Mr. SHAYS. Dr. Karl. 

Mr. KARL. I haven’t looked into the superlative issue, the first 

one that Professor Shapiro mentioned. I have looked a little bit into 

the geometric mean, and I think the BLS should proceed cautiously. And by 1999, that would be about the appropriate time. 

Let me just raise why it has to go cautiously, so you understand 

the issue. Let’s take myself, as a consumer of tea and coffee. I love 

coffee. Double the price; I spend as much on it. I’d double my 

spending on coffee. And the geometric mean would say that I’m 

going to substitute down and spend less on coffee. 

So there are issues between the particular goods and choices that 

the geometric mean is applied to, in the calculation of the CPI. 

Mr. SNOWBARGER. Excuse me. If I could. 

Mr. SHAYS. Yes. 

Mr. SNOWBARGER. Isn’t that going to be handled in the CES? In 

other words, isn’t your buying pattern somehow going to be contained in all this? 

Mr. KARL. If you had a more frequent updating of the basket 

that people are actually buying, you could accommodate what the 

geometric mean attempts to do, as I understand it, which is to accommodate some of the substitution behavior for price changes. 

Mr. SNOWBARGER. Right. But, again, are we not doing this as 

often as we need to, either the CES or the market basket? Is that 

what we’re saying? 

Mr. BAKER. There’s another issue here, and someone may be 

more familiar with this particular aspect of the CES than I am, but 

in this particular example, my understanding is that the CES does 

not get to that low a level of disaggregation. So I believe the category would be noncarbonated beverages, something to that effect. 

Mr. SNOWBARGER. You mean—excuse me. 

Mr. SHAYS. No, that’s all right. It’s an interesting hearing, actually. I didn’t come thinking I would be as engaged. 

Mr. SNOWBARGER. You mean that the CES and this market basket of goods are not that closely connected, I mean, in terms of the 

data that they are trying to collect? In other words, don’t they try 

to find buying patterns on the same goods that they put in the 

market basket? 

Mr. SHAPIRO. Could I clarify this? 

156

Mr. SNOWBARGER. Yes. 

Mr. SHAPIRO. The CES is used to get the broad weights of fairly 

narrowly defined goods and services, like carbonated beverages. 

Then there is another BLS survey, called the Point of Purchase 

Survey, which actually tries to figure out what specific goods, down 

to the size of the can and brand and store, and that’s much more 

detailed. 

Mr. SNOWBARGER. That’s all within CES, though? 

Mr. SHAPIRO. No, that’s actually another survey called the Point 

of Purchase Survey. 

Mr. SNOWBARGER. You are the wrong people to answer this question, but is that calculated into the CPI measurement? 

Mr. SHAPIRO. Yes. 

Mr. SNOWBARGER. It’s used as well? 

Mr. SHAPIRO. They use that to figure out exactly—when they are 

trying to represent the price of carbonated beverages, they actually 

choose this can of Diet Coke. 

Mr. SNOWBARGER. So the fact that Dr. Karl is a coffeeholic is 

going to show up in this point of purchase, as opposed to CES, but 

it will be taken into account? 

Mr. SHAYS. You’ve just ruined his reputation. 

Mr. SNOWBARGER. Not really. I wasn’t putting a value judgment 

on that. 

Mr. SHAYS. Could I just have you, Mr. Hulten, just respond to 

the issue of the substitution geometric? 

Mr. HULTEN. Well, it strikes me that the timetable set by the 

Commissioner is reasonable, although I’m certainly not an expert 

on this phase of the problem. But it may actually have a spillover 

benefit on the quality side, because it’s my understanding that part 

of the quality problem is really being masked by a formula bias. 

I think that we would see a different quality measurement from 

BLS, when this switch is implemented. This might qualify as some 

mid-level hanging fruit in the quality area. 

Mr. SHAYS. Do you want to say one thing? And then I’m going 

to wrap this up. 

Mr. SHAPIRO. I just want to clarify one point about the magnitude of the high-level substitution bias. I’m putting a table into 

the record, giving our estimate, and retrospectively looking over the 

period 1988 to 1995. We estimate that it was 0.32 percentage point 

per year. Now, that somewhat overstates what the effect of fixing 

the bias would be. Because the BLS is going to update the baskets, 

but our estimates would be closer to 0.2 percentage points per year, 

not the 0.1 that Mr. Baker stated. 

Mr. SHAYS. I might just say, Mr. Chairman, that I came to this 

hearing with, first, no hidden agenda, just a general bias that said 

that somewhere between 0.6 and 1.1 was probably where I would 

come down in this mix, and thinking that we could take pretty 

quick action. In other words, a sense that we should move more 

quickly, because the thought that we would be overcompensating, 

to me, would be very distressing. 

The four of you have basically backed up the BLS, so I’m trying 

to now figure out what your biases are, because you don’t agree 

with what my original view was. But you all seem to be saying, it 

seems to me, and I want to make sure I’m clear on this, that there 

157

are changes that can be made, that the changes might have an impact of somewhere between 0.4 and 0.5, in the near future, but not 

as quickly as I would like. 

We’re working on balancing the budget by the year 2002. You are 

just saying that we’re not going to be able to, from a budgetary 

standpoint, see the benefit in the budget until the end of that effort. And you are backing the Bureau of Labor Statistics’ view that 

they, at the earliest, 1999, is when you’re going to start to see the 

impact of a change. Is that pretty fair an analysis? 

OK. I would also, if I could, just state for the record that Mr. 

Moulton, Brent Moulton, who works for the Bureau of Labor Statistics, is here, and I appreciate that someone from the Bureau stayed 

to hear your testimony. I think that’s important, so I appreciate 

that. 

I found your testimony very interesting and very helpful. 

And I found this hearing very helpful. Thank you, Mr. Chairman, 

for having it. 

Mr. SNOWBARGER. Well, thank you. 

I want to thank the witnesses for both waiting through the first 

panel, as well as presenting your testimony and answering questions. 

I would also like to thank the chairman for the opportunity to 

Chair the committee today. Thank you very much. 

With that, we will be adjourned. 

[Whereupon, at 1:15 p.m., the subcommittee was adjourned.] 

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